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Securities Fraud

Federal and state securities laws.

These laws govern the offer, sale, delivery, and trading of securities.   Federal and state laws also regulate the activities of stockbrokers, investment advisers, and other professionals, some of whom have a fiduciary duty to their customers, while others may not. The laws also regulate the forms of offerings, the people who may be offered or sold securities, and the types of information that must be disclosed.  


Disclosure is the byword of the securities laws.  The proper — and improper — disclosure of information related to securities, financial and otherwise, is thus also heavily regulated. This includes not only prospectuses, formal offering memoranda, proxy statements, financial statements, and other formal paper, but all other information that may be communicated during a sales pitch, whether over the phone or in person, via email or twitter or however.  These rules, which are quite extensive, apply with equal authority to big and small companies, from Merrill Lynch to the oil and gas company calling you on the phone asking you to invest in a well.  They also apply to the Wall Street companies, investment companies, banks, public companies, private companies, partnerships, trusts, shareholders who want to sell their shares to a neighbor or a friend, and anybody else selling stock, bonds, or other investments.


Securities isn’t just a fancy word for stocks, or even stocks and bonds.  It’s important to realize that a “security” is defined very broadly under the law to include stocks, bonds, notes, investment contracts, or other agreements where someone is investing in a common enterprise and looking for profits to the efforts of the enterprise.  For example, this may include  small percentage interest in an oil well, or future oil well, sold over the telephone to an investor, an oil and gas lease, a mortgage held by the former owner on the property where the well is located, a security agreement on the well used to drill for oil, and the promissory note the driller gave to the bank.  Under the classic “Howey” test, if the investor’s own actions are involved in determining whether a profit is made, it’s probably not a security.  If the activities that might generate a profit are completely or even mostly outside the control of the investor, it is probably a security.

Sales of securities.

Securities are sold in as many ways as there are to sell just about anything – verbally, over the phone, by mail, by prospectus, or by a broker or brokerage house.  They can be registered or unregistered, and they can be properly — or improperly — called “securities,” “interests,” “stock,” or whatever.  What they’re named is irrelevant under the law — if they’re a security, they are a security.

Risks.  Most of the problems arise when the risks to the purchase of a security are not fully disclosed. This can be the result of a verbal assurance as well as a false statement on paper.   If you wake up one day and see that the value of your security (whatever it is) has gone from ten to zero, or from eight to five, and you don’t understand why or how, or you were told, “no problem, you’ll earn twelve percent a year,” and you’re actually losing twenty per month, there is a very good likelihood that the true risks involved in buying the security were not properly conveyed to you – as they should have been under the law.


The most important lure to the seller of a security is often the commission to be earned on the sale.  Brokers almost always don’t own the stock – they just earn money on the sale.  The amount of their commission should be fully disclosed, up front, and you should check to make sure what you’re told is accurate.

Braden W. Sparks has represented institutions and high net worth individuals in trials, mediation, and arbitration to pursue losses arising from illegal offers, sales, deliveries, false representations, omissions, outright fraud, and other securities claims.


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