If you survived the financial meltdown of 2007-08, you understand that buying and selling securities is what Tom Cruise would refer to as Risky Business. Charlatans across the investment spectrum try to take investors for rides by offering financial scams such as slices of debt packages that borrowers will never be able to pay back. Fortunately, the United States government has created securities laws that protect consumers against fraudulent practices.
Legally defined as financial instruments that possess value, securities represent one of the most complex legal niches for attorneys. You need to consult with an attorney who specializes in securities law to understand if you are investing hard-earned income into legitimate investments. Individuals and businesses that buy and sell securities must follow clearly defined rules and regulations. The failure to comply with securities laws can lead to the filing of criminal charges, as well as civil lawsuits that run into tens of millions of dollars.
Companies that issue financial securities must abide by strict regulations that mandate full disclosure of securities information, which includes the true value of securities offered for sale. Individuals and companies that deal securities must file the appropriate paperwork required by the Securities and Exchange Commission (SEC). Any entity that sells you securities must comply with Generally Accepted Accounting Principles GAAP). Brokers have additional legal responsibilities that include the type of investment advice they are legally allowed to offer clients. Investment advice violations sometimes include the passing of inside information that gives certain investors financial advantages over uniformed investors.
Government rules and regulations do not deter corrupt brokers and securities companies from defrauding investors. Common securities law violations include fraud, insider trading, and market manipulation. If you saw the movie Trading Places, you understand that the commodities market is vulnerable to widespread market manipulation. Market manipulation also includes “creating a false impression about a security or the trading activity of a security.”
Brokers also commit securities fraud by conducting unauthorized trading or by using one client’s account to trade securities for a different client. Churning represents the illegal practice of overtrading on a client’s account to generate more sales commissions. Under federal securities law, unsuitability is the unlawful practice of making recommendations on investments that run directly “contrary to the known objectives and financial background of an investor.” Omissions and misrepresentations are common securities abuses performed by brokers that refer to the filing of incorrect paperwork. Omissions can be as simple as not including the date at the top of a securities form. A misrepresentation often involves deceiving an investor about the specifics of a specific type of security. Deception is rampant with the sale of ambiguous derivatives that rarely define a security clearly.
Federal securities law refers to most of the functions performed by the securities industry, including penalties for broker negligence. The Securities Act of 1933 addresses the legal requirements for issuing securities, while the Securities Exchange Act passed one year later governs that sale, trading, and purchase of financial securities. Both landmark laws give legal power of regulation to the SEC. Another important securities law passed during the Great Depression called the Glass-Stegall Act was repealed by Congress and President Bill Clinton in 1999. The Sarbanes-Oxley Act of 2002 also regulates the securities industry.
If a securities broker or company has defrauded you, contact our California law office to schedule a free initial consultation with one of our licensed consumer law attorneys. It is important that you closely monitor the activity on your investment accounts to prevent securities fraud.