Securities Fraud

By Brennan, Jason C.; Jerstad, Mike et al. | American Criminal Law Review, Winter 1995 | Go to article overview

Securities Fraud


Brennan, Jason C., Jerstad, Mike, Jenkins, Kimberly A., Shweiki, Opher, American Criminal Law Review


Seven statutes regulate securities transactions.(1) In the aftermath of the stock market crash of 1929, Congress passed the most important of these statutes, the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 1934 ("1934 Act"). Their purpose is to ensure vigorous market competition by mandating full and fair disclosure of all material information in the marketplace. This article focuses primarily on Section 17(a) of the 1933 Act,(2) section 10(b) of the 1934 Act,(3) and Rule l0b-5 promulgated under the 1934 Act,(4) outlining the elements of securities fraud by describing the various activities considered to be substantive frauds under these laws. This article also explains common defenses to charges of substantive fraud as well as the enforcement mechanisms available to the government. Due to the frequent overlap of civil and criminal law in securities regulation, this article incorporates an overview of the law in the civil context in addition to exploring securities fraud as a white collar crime.

1. ELEMENTS OF THE OFFENSE

Although both the 1933 Act and the 1934 Act provide for various types of criminal conduct,(5) the section employed most frequently in criminal prosecutions for fraud in the purchase or sale of securities is section 10(b) of the 1934 Act(6) and Rule l0b-5 promulgated thereunder.(7)

To maintain a securities fraud cause of action, three elements must be proven: (1) the existence of a substantive fraud, including material misrepresentations or omissions, a scheme or artifice to defraud, or a fraudulent act, practice, or course of business;(8) (2) in connection with the purchase or sale of a security or in the offer or sale of a security;(9) and (3) employing the use of interstate commerce or the mails.(10) In addition, each area of substantive fraud has its own necessary elements for establishing a cause of action.

A. Substantive Fraud

1. Material Omissions and Misrepresentations

Material misrepresentations and omissions give rise to the most common type of securities fraud action. Rule l0b-5 proscribes any and all such false statements if they are made in connection with the purchase or sale of securities.(11) In order to establish liability under the 1934 Act, four elements must be shown: (1) the defendant committed a misstatement or omission of a material fact; (2) which was made with scienter; (3) on which the plaintiff reasonably relied; and (4) which proximately caused the plaintiff's injury.(12)

a. Misstatements and Omissions

In recent years, the Securities and Exchange Commission ("SEC") and the Department of Justice have vigorously prosecuted individuals who misrepresent or omit material information in a securities filing.(13)

The Fifth Circuit has upheld the conviction of a businessman involved in a scheme to inappropriately use corporate funds to cover loan payments used to expedite the sale of a company,(14) and has found a land developer liable for failing to disclose material facts regarding his property in connection with a bond offering.(15) The Seventh Circuit has found a stock purchaser liable for falsely denying his intention to make a tender offer,(16) and other circuits have found defendants liable for misrepresentations and omissions in projections if those projections failed to suggest reliability, were not sufficiently cautious in tone, were not made in good faith, or were not founded on sound factual or historic bases.(17)

Liability has also been found in cases involving omissions and misrepresentations in connection with the sale of real estate limited partnerships,(18) misstatements regarding a stock purchaser's true speculative intentions,(19) and nondisclosure of a corporation's economic condition.(20)

b. Materiality

Merely demonstrating an omission or misstatement is insufficient to prove securities fraud unless the information is material. In TSC Industries, Inc. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Securities Fraud
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.