According to the Federal Bureau of Investigation, the term “securities fraud” covers a broad spectrum of activities characterized by the misrepresentation or omission of material information to investors in during the purchase or sale of securities. It can also extend to manipulation of national financial markets. Some of the activities the FBI designates as securities fraud include Ponzi and pyramid schemes, high yield investment fraud, advance fee schemes, insider trading, falsifying details in corporate filings, lying to auditors, and manipulating share prices. The Security and Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to monitor and enforce laws related to securities fraud. The SEC provides a detailed guide to avoiding securities fraud through the office of investor education and advocacy that is a useful tool in keeping business operations legal.
According to the Securities Exchange Act of 1934, Section 10(b),
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange… [to] use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
In addition to these specifications, securities fraud cases are also held to the SEC’s Rule 10b-5, which states:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
Securities fraud cases brought under the 1934 Securities and Exchange Act and Rule 10b-5 require the plaintiff to meet a number of requirements. These elements are critical to proving securities fraud occurred; and, if not met, will frequently result in cases being dismissed.
In addition to federal securities fraud claims governed by the Securities and Exchange Acts of 1933 and 1934, most states have enacted their own securities laws. In Texas, the Texas Securities Board oversees the Texas Securities Act. While the Texas Securities Act often mirrors the elements of federal securities fraud laws, a Texas Securities Act misrepresentation claim has distinct differences from a claim brought under Rule 10b-5. Notably, most misrepresentation claims brought under Texas Revised Civil Statute 581-33 do not require scienter/intent or reliance. E.g., Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 344 (5th Cir. 2008). Similarly, a claim for fraud in a stock transaction under Texas Business & Commerce Code § 27.01 does not require a plaintiff prove the defendant knew the false information was false when statement was made.
Securities fraud claims can be detrimental to any company facing a claim and the fraud associated therewith can cost investors millions in financial losses. Whether it is individuals in an organization who have committed fraud or multiple company employees or directors, it is critical to have proper representation when filing or facing a securities fraud claim.