The ABCs of Securities Litigation Claims

From time to time, you may hear news stories about the Department of Justice (DOJ) investigating and prosecuting cases involving publicly traded companies. These cases can involve hundreds of millions of dollars. Sometimes, monetary amounts reach over a billion dollars. It's not surprising that these cases grab headlines.

The DOJ has a unit devoted to prosecuting fraud and manipulation under U.S. securities law. They have entered into landmark resolutions for violations of the commodities and securities laws against investment banks, hedge funds, and other issuers of investment products.

What about individual investors? What kind of claims can you bring? Investors may assert several claims when wrongdoing beyond market forces causes investment losses. Understanding causes of action and what conduct supports a legal claim will help you protect yourself from abuses. You'll know how to identify actionable conduct if it occurs.

Read on to learn about laws governing the securities industry, the types of claims available, and the procedures used to bring claims.

Securities Laws Governing the Securities Industry

Congress passed the Securities Exchange Act of 1934 in response to the stock market crash in 1929. Among other things, it created the U.S. Securities and Exchange Commission (SEC). 

The SEC regulates many aspects of the American markets. These include the following:

• American stock and security exchanges
• Brokers
• Investment advisors
• Mutual funds

The SEC's regulatory power includes the ability to bring SEC enforcement actions against financial institutions and those providing financial services. SEC investigations against corporations or individuals often involve violations such as:

• Accounting fraud
• Providing misleading statements or information
• Insider trading in violation of Rule 10b-5
• Failing to disclose information in public reports

Many federal and state laws apply to the securities industry. At the federal level, the federal securities laws control most aspects of the securities industry.

Federal securities laws include the following:

• Securities Exchange Act of 1934: governs the purchase, trading, and sale of securities
• Securities Act of 1933: addresses the issuance of securities by companies
• Investment Company Act of 1940: Regulates companies that engage in investing, reinvesting, and trading securities
• Investment Advisers Act of 1940: Regulates firms or sole practitioners compensated for advising others about securities investments. It also ensures that they follow securities regulations.
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Sets forth regulations impacting consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance for public companies, and transparency in the U.S. securities markets
• Sarbanes-Oxley Act of 2002: Mandated reforms to enhance corporate responsibility, improve financial disclosures, and combat corporate and accounting fraud by financial professionals

In addition to federal laws and regulations governing the securities industry, state security laws also regulate the securities industry. State securities laws, often called blue sky laws, govern securities. Each state has its own securities regulators.

If you recognize any of the following scenarios, contact an attorney with experience handling securities litigation claims. They can explain your legal options.

Types of Securities Claims

Numerous types of securities violations can be committed. Knowing what they are can help you avoid being victimized by one.​

Breach of Fiduciary Duty

A breach of fiduciary duty claim comes from common law, not a specific statute. Brokers occupy positions of trust and confidence with their customers. Broker-dealers owe clients the highest duty of loyalty and fidelity. Investment activity violating that duty may entitle you to bring a breach of fiduciary duty claim.

Conflict of Interest

Conflict of interest claims have recently received a great deal of media attention. A conflict of interest can develop when a large securities firm performs multiple roles. Conflicts can occur when the firm engages in investment banking activities, stock analysis, and brokerage activities.

Securities analysts may evaluate a particular stock favorably if the company is an investment banking client. Similarly, the firm may give lower ratings to clients' competitors. In either event, investor losses linked to this conduct have the potential to recover. Investors may bring a claim under a conflict of interest theory.

Churning

Excessive trading on a client's account is called churning. Sometimes, stockbrokers make an excessive number of trades because they want to boost their commission. Victims lose money due to unsound timing of trades. Clients also lose money due to increased broker fees associated with heavy trading.

Failure To Diversify

Broker-dealers must act in line with the client's objectives. Brokers who put all the client's assets in a single stock or industry may be subject to a claim for failure to diversify. Brokers are supposed to lessen market risks by keeping clients' funds invested in a range of securities.

Failure To Supervise

Sometimes, brokerage firms' management fails to monitor broker trading activity properly. When investor losses occur because of wrongdoing, investors may be able to assert a failure to supervise claim against the firm.

Ineptitude or Malpractice

Malpractice refers to a situation in which a professional harms a victim by providing substandard services. This means that another professional with equal training might have avoided harming the victim.

Brokerage malpractice refers to cases where stockbrokers or analysts issue unfounded, incorrect, deceptive, or otherwise misleading advice to their clients. As a result, the client may make poor investment choices and lose significant amounts of money. A securities firm employing a stockbroker liable for malpractice may also have legal responsibility for investor losses.

Insider Information

Insider trading occurs when a person with inside knowledge about a company's dealings uses that information to trade stocks. Those with confidential information not yet disclosed to the public can use it to benefit a small number of investors to the detriment of the remaining investors. People with access to inside information include:

• Brokers
• Stock analysts
• Investment bankers
• Company employees

It is illegal for anyone with inside information to buy or sell stocks based on their unique perspective or special knowledge.

Market Manipulation

Market manipulation occurs when a company, broker, or individual investor undertakes an activity to project a particular appearance. The individual may attempt to create a false impression regarding the following:

• A security
• Trading activity or price movement
• Other market-related information

Creating situations that induce investors to buy or sell can lead to a securities violation for market manipulation.

Misrepresentation

Members of the securities industry face liability for giving out wrong information. Concealing accurate information works similarly. Misrepresentations may exist in a company's public filings and papers or when a broker or brokerage firm publicly supports a stock while privately admitting that it is a risk or a bad buy.

Omission of Facts

This form of securities fraud occurs when a company or broker intentionally misleads investors about material facts regarding a security by failing to disclose important information regarding the offering.

The U.S. Supreme Court decided a case in 2023 involving omission of facts. It has significant implications for securities class actions. This 2024 decision helps define the scope of private securities litigation.

The Supreme Court, in a unanimous decision, held that pure omissions could not be actionable under the federal securities laws' anti-fraud provision, Section 10(b) of the Exchange Act, and its enabling rule SEC Rule 10b-5. The Southern District of New York had dismissed the plaintiffs' claims. On appeal, the Court of Appeals for the Second Circuit vacated the district court's dismissal.

Precedents from lower courts had opened the door to pure omission securities fraud claims. This was the prevailing view in the Second Circuit, the busiest circuit for securities class action litigation. Pure omissions cannot support securities fraud litigation.

Risky Investments

Risky investments involve stocks with the potential to yield high returns. These same investments also have a higher possibility of significant losses. In the worst-case scenario, the investor loses all the original investment.

Responsible brokers ensure their clients understand the risk associated with their investments. Brokers should only proceed if the risky investments align with the client's objectives for the funds. The client must understand the risks and cope with potential losses. Examples of risky investments include hedge funds, start-ups, and buying on margin.

Trading Without Permission

Brokers must make their clients aware of their activities. Brokers cannot make trades on a client's account against the client's will. If you have experienced unauthorized trading activity on your behalf, you may have a claim for trading without permission.

Unsuitability

Brokers can make investment recommendations that are inappropriate for the client's objectives. Brokers who make investment recommendations contrary to a particular investor's known objectives and background may be at fault. Such trading activity puts the broker at risk for a legal claim based on unsuitability.

Legal Proceedings To Bring Securities Litigation Claims

As discussed above, many securities litigation claims are available to investors who experience losses. Investors have the potential to bring these claims in a variety of venues and proceedings.

Your client agreement contract should outline dispute resolution. The contract determines how a client resolves disputes with the broker or brokerage firm. It can depend on the type of claim you are asserting.  

Types of Possible Securities Litigation Legal Proceedings

While you can hope to never be faced with seeking legal action due to the actions of your broker, knowing the options available can help.​

Individual Lawsuit

Most people are familiar with an individual lawsuit. As an investor, you would file a lawsuit in the proper court against the wrongdoer. With the complexity of security law, it is wise to have legal representation.

A legal professional will advise whether the claims can be litigated in an individual lawsuit. Most client agreements with brokerage firms require arbitration for most claims. This means that you will be unable to bring a lawsuit in court. If an individual lawsuit is an option, a securities attorney can guide you to the specific claims to bring.

Arbitrating Claims

Arbitrating securities claims against broker-dealers is more common than litigation. Arbitration is not a court process. A panel of neutral arbitrators decides the dispute. However, it's wise to have an experienced securities lawyer represent your interests.

FINRA, or the Financial Industry Regulatory Authority, is a non-governmental organization. FINRA works under SEC supervision. FINRA's rules govern the arbitration process. The FINRA arbitration process is compulsory. FINRA members must answer claims.

Securities Class Action

Class action litigation is a way to litigate a case involving a group of plaintiffs who sue the same defendant based on similar claims and injuries. A securities class action lawsuit often involves a group of investors bringing suit alleging claims such as:

• Securities fraud claims, including fraud and deceit
• Inaccurate reporting of financial data
• Poor corporate governance
• Deficient accounting
• Insider trading

When an investor brings suit, they must identify who qualifies as a class member. The judge must certify the proposed class. Class certification requires the plaintiff to prove that the case is suitable for a class action. If not, the judge will dismiss it.

Most class actions do not make it to trial in the U.S. district court for the applicable federal district where the case is brought. The same is true for any case brought in state court. Following legal motions, many cases get dismissed by the court. Such motions include a motion for summary judgment. Other cases are settled out of court.

Shareholder Derivative Action

A shareholder derivative litigation seeks to remedy harm to the company. A shareholder can take legal action on behalf of the company in a derivative suit. The plaintiff of a derivative lawsuit is a shareholder. The shareholder brings the action in state courts or the applicable federal court.

Any resulting damages benefit the corporation. These actions address corporate governance and other actions by corporate directors or officers.

Get Help From a Securities Attorney

Although it's difficult to determine if your losses will support a securities litigation claim, trust your instincts. If you note any suspicious activity and feel you have been wronged, contact an experienced securities attorney. They will have extensive experience and be knowledgeable about the relevant legal claims available to you.