Securities Fraud

Securities fraud may refer to a number of illegal activities involving the sale or purchase of securities. It often involves broker or investment firm misconduct intended to induce investors to buy stocks they may not otherwise purchase. This is often achieved by misrepresenting or omitting important information, manipulating stock prices, or otherwise violating U.S. or state securities regulations.

The SEC Enforces Securities Regulations

The Securities and Exchange Act of 1934 created the Securities and Exchange Commission (SEC), which is the federal agency charged with ensuring compliance and enforcement of federal securities laws. The SEC has the power to investigate those suspected of committing securities fraud and other violations of securities law.

U.S. law, however, also gives private investors the power to enforce securities regulations by filing a lawsuit in federal court against the offending broker or investment firm. Many states have also passed securities regulations that give private investors a right to sue perpetrators of securities fraud.

Rule 10b-5

One commonly cited federal law prohibits many types of securities fraud and provides the basis for private investors’ securities fraud lawsuits. It is located at 17 C.F.R. § 240.10b-5 and is often referred to simply as Rule 10b-5.

Rule 10b-5 addresses one of the most common types of securities fraud: broker misrepresentation or omission. Federal law prohibits a person from misrepresenting or omitting material facts in connection with the sale of a security. One example of important material information is the risk associated with a particular investment. Should a broker misrepresent the risk of a potential investment to a client, the broker may have violated Rule 10b-5.

Beyond misrepresentation or omission, Rule 10b-5 is also used as a basis for several other types of securities fraud, including insider trading, stock price manipulation, and other practices that rely on deceit or fraud. In many cases, 10b-5 lawsuits are consolidated into class actions, since many brokers who violate securities regulations have defrauded many clients.

Other Forms of Securities Fraud

There are many other forms of securities fraud beyond those prohibited by Rule 10b-5. Examples include Ponzi schemes, pyramid schemes, broker embezzlement, and internet investment fraud. If you believe you have been defrauded by one of these or a similar scheme, contact an attorney in your state.

While the term “securities fraud” may refer to a wide range of illegal activity, it does not encapsulate all illegal or unethical behavior that investors may encounter. Since brokers have obligations to their clients beyond the technical definition of securities fraud, behavior that may not constitute securities fraud may give rise to other causes of action. Examples include an investment adviser’s breach of fiduciary duty to his or her clients and broker negligence and malpractice. In many cases, investors brings claims that allege multiple causes of action, including securities fraud.

Check Your State Laws

Many states have passed their own securities regulations, often called blue sky laws, which provide additional protections for investors in that state. For example, many states provide a private cause of action for broker misrepresentation, similar to Rule 10b-5. Some states do not require proof that the investor relied on the misrepresentation in making investment decisions, but a suit alleging a violation of Rule 10b-5 does require reliance. As always, consult an experienced attorney in your state if you have questions about state laws.