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Securities Law: An Overview

During the boom years of the 1990's the stock market and its successes fueled an historic period of prosperity. Average Americans often got into the market via investments made through their retirement accounts. They watched their nest eggs grow with amazement. When the bubble burst, they watched with horror as their savings evaporated.

Of course, economic factors beyond anyone's control contributed to the market's decline. But, as the headlines show us, economics alone are not the only cause of some of the financial losses suffered by both individual and institutional investors. Admissions by companies like Enron, World-Com, and ImClone, and allegations against individuals like Martha Stewart and Jack Grubman indicate that corporate and individual wrong doings contributed to the losses suffered.

To operate as intended, the financial market requires full and fair disclosure relating to corporate operations, financials and all transactions conducted in it. Complex federal laws and regulations, as well as related state laws govern all aspects of the issuance, sale and purchase of stocks and other securities. When federal and state laws and regulations are violated and investors suffer financial losses, they may be able to bring a securities lawsuit.

Securities litigation can be difficult. The agreement an investor has with a broker may place limits on an investor's litigation options. Federal legislation contains strict standards of proof. Accordingly, if you have suffered financial losses because of a securities-based investment and you believe that more than the economy is to blame, it is important that you contact an attorney with experience representing investors to review the circumstance of your individual situation.

Securities Laws

Securities come in a wide variety of forms. Investment vehicles like stocks, mutual funds and bonds all share similar characteristics. As securities, they reflect investments by various individuals and entities in a common enterprise, like a corporation, made with the expectation of deriving a profit. Additionally, as securities, all transactions surrounding these and other related investment tools are controlled by a complex system of federal laws and regulations as well as state statutes.

At the federal level, the Federal Securities Laws control most aspects of the securities industry. The Federal Securities Laws consists of The Securities Act of 1933, which addresses the issuance of securities by companies, and The Securities Exchange Act of 1934, which governs the trading, purchase and sale of securities. These laws also authorize the Securities and Exchange Commission ("SEC"), the federal governmental agency with oversight and control of the industry, to issue further regulatory controls. Additional federal legislation like the Private Securities Litigation Reform Act and the Sarbanes-Oxley Act of 2002 also impact the securities industry and claims related to its practices.

The various federal statutes and regulations that make up the Federal Securities Laws contain specific rules regarding truth and fair dealing in the issuance and sale of covered securities. In addition, most states have their own laws addressing some aspect of securities sales that allow the state's securities commissions to conduct investigations and bring securities fraud actions. Remedies for losses associated with securities also exist under various state and federal common law doctrines.

Common Securities Abuses

The securities industry is complex and each of its players has a distinct set of rules that it must follow. The breach or breaking of those rules usually occurs in predictable patterns depending upon the player's role in the industry.

Company Abuses

Those issuing securities face clear rules about disclosures of information affecting the value of the investment. Securities issuers must file multiple documents with the SEC regarding the value of their company and assets and they must follow Generally Accepted Accounting Principals (GAAP). Individuals within a company may not use knowledge gained from their position to get an unfair advantage over less knowledgeable investors. Failure to follow these and other rules support the following securities litigation claims.

  • Insider Trading
    Insider trading occurs when a person with inside knowledge about a company's dealings uses that information to trade stocks. People who may have access to inside information include brokers, stock analysts, investment bankers, and company employees. It is illegal for anyone with inside information to buy or sell stocks based on their unique perspective or special knowledge.

  • Fraud
    Fraud claims against companies frequently occur in relation to their public offerings and the documents filed supporting those offerings. Specific claims may relate to financial statements, initial public offerings, takeovers, and accounting practices.

  • Market Manipulation
    Market manipulation occurs when a company, broker, or individual investor undertakes activity in order to create a false impression regarding a security, its trading activity or price movement, or other, related market information.

Broker-Dealer Abuses

Both the individuals and institutions involved in the buying and selling of securities must comply with strict rules regarding the investment advice they give as well as the actions they take with client money. Broker-dealer misconduct that may be addressed in securities litigation includes some of the following.

  • Churning
    A claim for churning may exist when a stockbroker executes excessive trading on a client's account in order to boost commissions. Investor losses occur from added broker fees as well as poorly timed trades.

  • Unauthorized Trading
    Brokers may not execute trades without investor authorization or in direct contradiction of a client's order.

  • Misrepresentation and Omissions
    Misrepresentation and omission occur when a securities firm or individual broker purposefully gives out wrong information, or conceals true information.

  • Unsuitability
    Broker's who make investment recommendations that are inappropriate to the known objectives and background of a particular investor may be subject to claims for losses based on unsuitability.

  • Misappropriation
    Misappropriation occurs when a broker sells a client's accounts and keeps the proceeds for him or herself. Investors may be able to bring a claim to the brokerage firm that employs a broker who engages in misappropriation because of negligent supervision or based on the legal doctrine that makes employers responsible for the acts of their employees.

Investment Scams

Con artists continue to use old-fashioned tricks and tactics to dupe investors with fraudulent investment schemes. Increasingly, they are using technologies like the Internet and telecommunication to help them defraud investors. Investors, usually senior citizens, are tricked out of savings through the use of high pressure sales tactics and unrealistic promises of huge financial returns from securities investments such as stocks and bonds, oil and gas leases, or limited partnerships.

Options for Securities Litigation

Investor claims arising from securities related losses may occur in different kinds of actions. Investors may be able to bring a lawsuit in state or federal court against the person, company or companies that caused their losses. Investor claims may also be resolved through participation in a class action lawsuit or through arbitration. Investors may not always have a choice as to the forum in which they get to bring their complaint.

  • Securities Class Actions
    When a group of investors share a common injury because of securities associated wrong doings, they may be able to participate in a class action. Common securities class actions arise from company abuses like insider trading and failure to properly document earnings.

  • Arbitration
    Many investors are unaware that the paperwork they sign upon retention of a broker requires them to resolve any claims related to the broker's activities in arbitration. The National Association of Securities Dealers (NASD) provides services for a large number of securities related arbitrations. While investors originally believed that arbitration was skewed in favor of brokers, recent statistics show investors often fare well in securities arbitrations, particularly when an attorney represents them.


Members of the securities industry must provide accurate information to the individuals and institutions that are their investors. Federal laws and regulations dictate strict standards for accounting, information disclosure and the handling of investor assets. When violations of those standards occur, injured investors have the right to pursue securities litigation claims.

Securities litigation requires a detailed understanding of the controlling laws, regulations and industry standards. Determining where to bring a securities related claim is often as complex as determining what claims should be brought. For that reason, when considering securities litigation, you should contact an attorney with experience pursuing members of the securities industry so that you may fully understand your rights and protect your financial interests.

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