Securities are assets that can be traded. Instruments representing financial value take the form of certificates that grant the holder rights associated with profit distributions of a business. A security is also any investment whose return depends primarily or exclusively on the efforts of someone other than the investor.
Generally speaking, the term refers to stocks, bonds, and notes. The term can also refer to other types of assets and investments.
Securities fall into the following categories:
- Debt-based securities, such as bonds and banknotes;
- Equity-based securities, such as common stock; and
- Derivative contract securities, such as futures and options.
Securities law covers a wide range of assets owned by individuals and businesses. In addition, securities law often falls under the broader category of finance law, which addresses assets, loans, and other valuables. Various federal laws and regulations govern the sale, purchase, and creation of security interests under securities law.
All investors, whether large institutions or private individuals, should have access to basic information about an investment before making a purchase. People can only make sound investment decisions through timely, comprehensive, and accurate information.
Securities are generally exchanged on securities markets. Trading markets may be especially vulnerable to unfair or manipulative business practices, such as insider trading and securities fraud. As previously discussed, securities markets are heavily regulated by federal and state laws to protect investors from such practices.
The Securities and Exchange Commission enforces securities law throughout the United States. Public companies must disclose meaningful financial information to the public to protect investors and maintain the integrity of the securities markets. The purpose of this is so that they can evaluate investments in securities before making them.
What Are Some Common Examples Of Securities Law Violations?
Every year, the SEC brings between 400 and 500 civil enforcement actions against individuals and companies that violate securities law. In addition to criminal infractions, these violations can result in incarceration and substantial fines.
Insider trading is a common example of a security law violation. Typically, insider trading refers to transactions in securities of publicly held companies made by people with insider information. A trader is typically an “insider” with a trust relationship with the company through employment or other relationships of trust.
Suppose an employee of a corporation learns that their company will merge with a competitor. When the merger agreement becomes public knowledge, the employee purchases shares of stock with the expectation that their value will increase. The employee has engaged in illegal insider trading by abusing their insider status.
Due to their high monetary value, securities are especially highly regulated. Securities law regulates violations such as, but are not limited to:
- Securities fraud;
- Loan fraud;
- Business non-compliance violations; and
- Tax-related violations, such as securities violations, frequently overlap with other areas of law.
Securities fraud occurs when a party uses fraud, misrepresentation, or untrue statements to sell securities. For a claim of securities fraud to succeed, the investor must have relied on the information given to them when making their decisions, and they must have suffered some harm.
In addition, the fraud must affect interstate commerce to be covered by federal securities fraud laws. A simple way to do this is to provide information over the telephone or the internet; also, individual states may have their own securities fraud laws.
Securities violations are commonly associated with trustees or people responsible for managing another person’s assets. Securities must be managed prudently by trustees and brokers. Therefore, a trustee may be liable for losses caused by mismanaged securities if this duty is breached.
Here are some other examples of securities violations and securities litigation claims:
- Market Manipulation: This can occur when a securities company, broker, or investor engages in any activity which creates a false impression regarding the price, availability, or distribution of a security;
- Breach of Fiduciary Duty: A trustee or broker cannot manage another person’s securities if they have a conflict of interest that would prevent them from remaining loyal to the beneficiary;
- Churning: Churning refers to when the broker engages in excessive amounts of trading to boost their sales commissions. This is considered to be unethical, and as such, it is prohibited by securities laws;
- Unauthorized Trading: Although trustees do have a degree of freedom to invest prudently and reasonably, they generally cannot engage in trading against the wishes of the stockholder who has employed them; and
- Malpractice or Ineptitude: Broker malpractice frequently occurs if an unqualified person holds themselves out to be a professional. An example of this would be brokering without a valid license.
The laws governing these types of securities violations may vary depending on the nature of the securities being traded. A common example would be how laws regulating the trade of stocks may differ from those regulating other types of securities.
What Are Some Common Penalties For Security Or Finance Violations?
Federal charges, associated with strict penalties, can often result in substantial legal penalties for securities violations.
Penalties can include:
- Either misdemeanor or felony charges;
- Civil or criminal fines;
- Jail or prison sentences, depending on the severity of the crime; and
- Business penalties, such as a suspension of operating license or loss of broker certification.
Securities violations can also lead to class action lawsuits. An example of this would be when a company’s fraudulent stock issuing affects a whole group of stockholders, who file a lawsuit against the company collectively. In addition to taking several years to complete, these lawsuits can cost a considerable amount of money.
What Is a Prospectus?
A prospectus is the legal offering or selling document that is a part of a company’s Registration Statement, which the company must file with the SEC before it can issue new securities to the general public.
A prospectus contains important information about a company’s business operations, financial condition, and management. Prospectuses must be made available to everyone who buys or offers to buy new securities.
What Is Not Included In a Prospectus?
Normally, a prospectus does not include:
- Copies of underwriting agreements
- Opinions of counsel about the company
- Copies of material contracts
- Articles of incorporation and bylaws
- Copies of underlying agreements relating to the offered securities
Why Is a Prospectus Important?
In a prospectus, all “material facts” that new investors might find important to make an investment decision are disclosed. Investors rely on the prospectus to be accurate when deciding whether to invest in a company.
What If a Prospectus Has Misleading Information?
Intentionally including false information or omitting material facts from a prospectus are forms of securities fraud. If there are any false statements of material facts or misleading omissions in the prospectus, the issuing company, its officers, directors, and any experts listed in the Registration Statement (such as accountants) are liable. A factually-inaccurate prospectus may give you a right to recover your investment money from the issuing company.
Do I Need an Attorney If I Relied On a False Prospectus?
Suppose you lose money because you relied on a company’s factually-inaccurate prospectus in deciding to invest with them. In that case, you will want to consult with a securities lawyer to protect your rights.
It is possible to recover your money if you consult with an attorney knowledgeable in securities law. A class action attorney may also be able to represent you and other persons who have also been defrauded.
