WHAT IS SECURITIES FRAUD?

How Do I Know If I Have Been Defrauded?

Many instances of securities fraud go undetected. Most investors will not even consider the possibility of misconduct until they are faced with the loss of their investment. Because the market naturally fluctuates, not every loss is indicative of fraud but it should cause concern and serve as the impetus for further investigation.

What to Look For:

Dramatic drop in value of stock in a short period of time.
Announcement by the company of wrong-doing (e.g. restatement of earnings, accounting violations or irregularities).
Financial results that are markedly different from prior publicly announced expectations.
Revelation of a material fact that is inconsistent with a prior representation.
Mergers: Fraud is not always dependent on a precipitous drop in stock price. For example, it could occur with the merger of two companies at a price that is unfair to shareholders of one of the companies. The decision to merge may be outside the boundaries of a legitimate business judgment.
Insider trading
Market manipulation
When a corporation issues misleading information to the public, or keeps silent when it otherwise has a duty to disclose

Trust your instincts: Give yourself credit in determining what is right and wrong. On its face, fraud may not always be a clear quantifiable event. It has many permutations, and when it is part of a well thought out scheme by sophisticated corporate insiders it can often be mischaracterized as a natural market fluctutation or blamed on an uncontrollable macro-economic event. If you feel that you have been wronged, then pursue the matter until you are satisfied that either the Company has done nothing wrong or that it has committed fraud.

Governing Law

How Do I Know? | Governing Law | Remedy

There are a number of laws applicable to securities regulation. Although some fraud claims are based on state statutes and common law grounds, most are dealt with under the federal securities laws. The two primary federal statutes are the Securities Act of 1933 ("1933 Act") governing the issuance of securities by companies and the Securities Exchange Act of 1934 ("1934 Act") governing the trading, purchase and sale of those securities. Although the acts contain provision for both criminal and civil liability, most shareholder remuneration is effectuated through application of the civil remedies.

Securities Act of 1933

Section 11:: Provides civil remedy in the case of a registration statement that contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. A purchaser of a registered security may sue under Section 11 as long as he or she can trace their securities back to the registered offering.
Section 12(a)(2):: Any person who offers or sells a security by means of a prospectus or oral communication that includes a material misstatement or omission is liable to his or her purchaser for rescission or damages. This section usually applies when a security is purchased on a company's public offering.

For those of you interested reading the full text of the Securities Act of 1933 it is available from the Practicing Law Institute.

Securities and Exchange Act of 1934

Rule 10b-5 promulgated pursuant to Section 10b of the 1934 Act

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 employ any device, scheme or artifice to defraud;
To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
To engage in any act or practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

For those of you interested in reading the full text of the Securities and Exchange Act of 1934 it is available from the Practicing Law Institute.

Remedy

How Do I Know? | Governing Law | Remedy

Although individual losses may be significant to a particular investor, they are often not large enough to merit an individual lawsuit. A defrauded shareholder seeking individual remuneration for losses runs the risk that attorney's fees will be greater than the incurred losses. Unfortunately, the shareholder finds himself/herself in the proverbial David v. Goliath situation in which a single shareholder has virtually no ability to effectively seek redress from a corporate defendant who can spend hundreds of thousands of dollars on lawyers and experts. To level the playing field, legislators created the concept of a class action by which groups of individuals, with similar concerns, can band together to fight a larger better financed corporate defendant.

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