People usually associate corporate securities fraud with things like insider trading, the Madoff Ponzi scheme, the Enron scandal, and the subprime mortgage crisis of 2008.
However, statutes and regulations that govern a company’s obligations to shareholders can have broad implications for corporations and their principal officers, far beyond the scope of these highly publicized scenarios.
Generally, these cases allege companies made false statements or withheld material information that, when revealed to the market, caused a significant drop in the company’s stock price. These suits are commonly pursued as class actions to allow all similarly situated shareholders to recover for the resulting loss of value.
Below, we will discuss the top securities litigation claims against corporations.
The Securities Act of 1933
Insider Trading Claims – Section 17(a):
Insider trading involves the use of “material, nonpublic information” by a company insider to sell or purchase stocks for their own benefit, or the benefit of a friend.
While insider trading usually claims only name those individuals accused as defendants, these cases can have repercussions on company’s reputation and garner unwanted attention from federal agencies like the SEC, the U.S. Department of Justice, and the media.
IPO Registration Statements and Prospectus Claims – Sections 11 and 12(a)(2):
These sections provide shareholders a private right of action against companies who allegedly gave false and misleading information during initial public offerings (“IPO”).
Generally, these states allege that public filings like the IPO registration statement or prospectus contained false information. In addition, the issuing company, investment banks that underwrote these offerings may also be implicated.
The Securities Exchange Act of 1934
Required that an investor obtaining 5% of a public company’s “float” (i.e., outstanding shares) submit a filing disclosing his intentions the SEC
Insider Trading Claims – Section 20(a):
Section 20(a) of the Exchange Act gives shareholders a civil right of action against corporate insiders who used the material, nonpublic information to their own benefit, or the benefit of an associate.
“Control-Person” Liability – Section 20(a):
Section 20(a) of the Exchange Act also provide shareholders a right of action against corporate executives, even if they did not have direct knowledge of the fraud.
In order to prove a control-person liability case, prosecutors must prove that an employee committed the violation under direct orders from an employer who has the ability to exercise control over that person.
This can be either direct control or control over the policy that the employee must follow. The purpose of this action is to be able to sue a supervisor if they fail to supervise a broker properly.
Inadequate Control of Accounting Practices – Section 10(b):
Section 10(b) of the Exchange Act gives shareholders a right of action against companies after the company fails to exercise adequate control over its financial and accounting practices.
Fraud in Financial Reporting – Section 10(b) and 13(b):
Section 10(b) and Section 13(b) of the Exchange Act also allows the SEC to bring actions based on the manipulation of information submitted in public filings and failure to maintain adequate internal accounting controls.
Injunctions to Halt Proxy Votes – Section 14:
Section 14 gives shareholders the right to sue to enjoin companies from conducting shareholder votes regarding mergers, acquisitions, tender offers, executive compensation, corporate governance, stock splits, and other issues.
- Typical cases involve allegations that: (1) a proxy statement fails to provide adequate financial information to make an informed vote on the merger, (2) complex issues were improperly condensed into a single question, or (3) the proxy statement contains inaccurate or false representations.
This section is used for merger/acquisition/tender offer situations.
The Foreign Corrupt Practices Act of 1977
The Foreign Corrupt Practices Act of 1977 applies to public companies with offshore operations and prohibits them from making, offering, or promising foreign officials personal payments or awards in order to influence their official duties.
Companies accused of making corrupt payments are subject to disgorgement of ill-gotten gains and civil and criminal fines.