Federal security laws were founded upon principles of fair and full disclosure. Information about a publicly traded company, the financial health of the corporation, and the products and services offered are reflected in the company’s stock price.
When the information is truthful, the company’s stock and bond prices are valued at a fair price. However, when a company intentionally or carelessly disseminates false information and/or fails to disclose all relevant information about their business, the stock or bond price can become artificially inflated. This is known as securities fraud. Investors in the company are affected when the true information is revealed and the price of the securities plummet.
A securities class action is brought by an investor on behalf of themselves and other similarly situated investors (known as the class). These investors purchased a company’s debt or stock in the same public offering or purchased the company’s debt or stock in the same range of dates (known as the class period) during the time a company is alleged to have been engaged in improper conduct.
Under the Private Securities Litigation Reform Act of 1995 (PSLRA), the first plaintiff to file a federal securities class action lawsuit must publish a notice of the lawsuit. Other investors have 60 days from the date of the first published notice to seek the court’s permission to serve as lead plaintiff.
In some cases, entire corporations are engaged in securities fraud. Some examples of corporate fraud include the collapse of Enron in the early 2000s and the subprime mortgage crisis that took place in 2007 and caused a major recession. Corporate executives at high levels in the company use the structures of the corporation to carry out fraudulent security schemes. They may misrepresent or withhold important information about the corporation in public filings to manipulate its stock price.
Stockbrokers, investment bankers, analysts, and traders may commit securities fraud with the access and resources obtained through their work. Providing false or misleading information to influence stock prices is a one form of securities fraud. Another form of securities fraud is insider trading, which involves trading on the stock market while using information that is not made available to the public.
Microcap stocks are low-priced stocks of smaller companies, which include penny stocks. These stocks are not traded on the big exchanges like NASDAQ. Since they are not traded on the big exchanges, they are not subject to the same disclosure requirements. A microcap fraud scheme involves the misrepresentation of the size of the company and the value of its stock, which often causes an individual to make a large stock purchase at an inflated price.
Ponzi schemes and pyramid schemes involve soliciting money from investors for an investment fund and then using their contributions to pay earlier investors that believe they are receiving revenue from the investment. The principals of the scheme skim money from all the investors’ contributions. One example of an investment scheme is the Bernie Madoff scandal that took place in 2008.
If you have invested in a publicly traded company and believe that you were the victim of securities fraud, contact Hach Rose Schirripa & Cheverie LLP at (212) 213-8311 to confidentially discuss your claim.