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Securities Arbitration and Litigation - An Overview

The federal securities laws are complex. If you have questions about these laws and the various types of securities abuses, contact an attorney.

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Securities Arbitration and Litigation - An Overview

The term "securities" covers a number of different instruments including stocks, mutual funds, bonds, notes, debentures, investment contracts, treasury stocks and transferable shares. When investors lose money because of violations of securities laws by a company, broker-dealer or analyst, they can bring a private suit to hold the defendant civilly liable and recover damages. Litigation and arbitration over violations of federal and state securities laws can be complex, expensive and time consuming. It is important to discuss your situation and potential claims with a lawyer at Kaufmann Gildin & Robbins LLP in New York, NY who has experience handling securities cases.

Federal Securities Laws

The Securities Act of 1933 was the first federal securities statute. The 1933 Act requires that all securities offered for sale be registered with the Securities and Exchange Commission (SEC) unless otherwise exempted.

The Securities Exchange Act of 1934 established the SEC and established rules governing the trading, purchase and sale of securities. The 1934 Act contains anti-fraud provisions, reporting and other requirements for issuers of securities, provisions covering oversight of broker-dealers, requirements for proxy solicitations and rules regarding tender offers.

Several other federal laws affect securities litigation. The Private Securities Litigation Reform Act of 1995 (PSLRA) was designed to prevent the "routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action…." H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730. The PSLRA established new rules for securities class actions and brought about several important changes affecting cases brought under the securities laws.

To circumvent the strict requirements of the PSLRA, many plaintiffs opted to bring a parallel suit in state court under state law. The Securities Litigation Uniform Standards Act of 1998 (SLUSA) was enacted to curb this practice. Under SLUSA, no "covered class action" based upon state statutory or common law and alleging a misrepresentation or omission of a material fact in connection with the sale or purchase of a covered security, or that the defendant used manipulative or deceptive devices in connection with the purchase or sale of a covered security may be maintained in state or federal court by any private party. 15 U.S.C. § 78bb(f)(1). SLUSA exempts from preemption certain class actions that are based on the law of the state in which the issuer of the security is incorporated; actions brought by a state agency or a state pension plan; actions under contracts between issuers and indenture trustees; and derivative actions brought by shareholders on behalf of a corporation. Under SLUSA, state courts retain jurisdiction over state agency enforcement proceedings.

The Sarbanes-Oxley Act of 2002 (SOX) includes a statute of limitations that applies to private securities fraud actions in the form of an amendment to the general statute of limitations of four years. The amendment provides that a separate statute of limitations of the earlier of two years after discovery of the facts constituting the violation or five years after the violation applies to claims of fraud, deceit, manipulation or contrivance.

The statute of limitations provision states that nothing contained therein shall create a new, private right of action. Another provision of SOX, making it unlawful for an officer or director of a public company to fraudulently influence or mislead auditors reviewing the company's financial statements, provides that the SEC shall have exclusive authority to enforce the provision in a civil proceeding. Besides these two provisions, there is nothing limiting an implied private right of action concerning the provisions creating crimes and making specific acts unlawful. However, there is no express statement that private actions are permitted.

In addition to the federal securities laws, most states have their own laws addressing some aspect of securities regulation and sales that allow the state's securities commissions to conduct investigations and bring enforcement actions.

Types of Securities Abuses

The following is a list of some of the more common types of securities abuses committed by companies and individuals, including broker-dealers:

  • Insider trading — when a person with material, nonpublic information buys or sells securities
  • Market Manipulation — when a company, investor or broker-dealer undertakes activity in order to create a false impression regarding a security, its trading activity or price movement or other relevant market information
  • Churning — when a broker-dealer excessively trades a client's account in order to generate commissions
  • Unauthorized trading — brokers carry out trades without investor authorization or in direct contradiction of a client's order
  • Fraud, misrepresentation and omissions — companies and broker-dealers can be liable for fraud, misrepresentation and omissions if they knowingly disclose false information or fail to provide information to correct previous statements
  • Suitability/unsuitability — brokers who make investment recommendations that are inconsistent with the client's known investment objectives and financial situation may be subject to claims for losses based on unsuitability
  • Misappropriation — occurs when a broker-dealer keeps the proceeds from a sale of a client's accounts for him or herself
  • Investment scams — con artists try to dupe investors with fraudulent investment schemes, often through email and the Internet, by promising unrealistic, large financial returns for a minimal investment

Securities Enforcement and Litigation Overview

The Securities and Exchange Commission (SEC) has the power to investigate alleged violations of federal securities laws, subpoena witnesses and compel the production of documents. The SEC can order a hearing against a person or firm registered with the SEC to determine liability and sanctions, including censure, limiting the registrant's activities or revoking registration. An administrative law judge (ALJ) presides over the hearing and issues an initial decision, which can be reviewed by the SEC. SEC "orders" are subject to judicial review in federal court. The SEC also has the power to seek injunctive relief for violations of the securities laws in federal court.

In addition to SEC enforcement actions and criminal prosecution by the Department of Justice (for federal securities violations), individuals can initiate private, civil suits against companies or individuals alleging violations of the securities laws. Private securities litigation often takes the form of a class action, in which a group of individuals who have been similarly injured by a violation of the securities laws join together to sue the defendant.


The federal securities laws can be confusing and claims arising under them are complex. If you have questions about the federal securities laws and the types of conduct that are actionable under these laws, contact an experienced attorney at Kaufmann Gildin & Robbins LLP in New York, NY.

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