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Securities Fraud

Securities fraud describes a collection of activities that violate securities investing or securities trading laws.


Securities fraud can take many forms but most commonly happens when a director, officer or broker materially misrepresents, withholds or distorts stock information or unlawfully discloses confidential stock-related information and a corporation or individual acts based on this information. 


The most common types of securities fraud include churning, insider trading, outsider trading and “pump and dump” scenarios. Churning describes the buying and selling of stock in order to generate commissions for the stockbroker at the expense of the client’s profits. Insider trading is the use of information that is not publicly available to make investment decisions. Insider trading prohibits employees of a traded company to take advantage of their access to market-sensitive information and use it to their benefit or to a third party’s benefit. Outsider trading is the expanded version of insider trading. It prohibits anybody, not just employees of the company, to use publicly not available material information to make trade decisions. Pump and dump utilizes high pressure sales tactics to convince investors to buy certain stocks. The sales tactics create enough interest in the stock to push the stock price up. Once a certain price point is reached the company, that initially convinced investors to buy, sells its own shares at a significant profit which causes share prices to drop and investors are left with a loss as a result.


Securities fraud is governed by both federal and state laws. The two main federal legal sources regulating the securities market are the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 Act addresses issuance of securities by companies, while the 1934 Act governs the trading, purchase and sale of those securities. Both the 1933 and 1934 Acts prohibit deceptive and fraudulent practices in connection with the sale of securities.


To successfully pursue a securities claim three elements have to be met; (1) there has to be substantive fraud either in the form of material misrepresentation, omission, fraudulent act or a scheme to defraud; (2) the substantive fraud has to be committed in connection with the purchase, sale or offer for sale of a security; and (3) interstate commerce or mail has to be utilized to commit the fraud. For criminal prosecution the element of “willfulness” is an added required element.


Securities fraud causes of action can be criminal, civil or administrative. Civil and criminal proceedings may be brought by the SEC (Securities and Exchange Commission) and private investors whereas criminal proceedings fall under the sole jurisdiction of the Department of Justice. Material misstatements and omissions carry a civil liability under the Acts whereas willful violations carry criminal liability punishable by fine and imprisonment.


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