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Securities Law Basics: Common Types of Securities Wrongs

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By Javier Lavagnino, Esq. on June 02, 2009 8:03 AM

In the latest news on a seemingly unending string of corporate-execs-gone-wrong, a jury yesterday apparently did not buy what Charles Conaway, the ex-CEO of Kmart Corporation, was selling to them in his trial for civil securities fraud. According to NPR, the jury found Conaway guilty of making misleading statements to investors prior to the giant retailer's bankruptcy. Although news headlines seem to almost constantly pour the heat on corporate executives (for reasons ranging from alleged ineptitude to criminal activity), there are actually a number of other players in the securities landscape that can and do face liability for wrongs under securities laws. Aside from con artists (which surely deserve a post of their own), here are some common securities abuses and the players at issue:

Company Abuses

These abuses happen at the hands of companies, as well as individuals within companies. The following are three common types of securities misdeeds within this class:

    1) Insider Trading - infamous insider trading happens when someone with "inside" info about a company's affairs uses that information to trade stocks. Although perhaps understandably tempting, it is illegal for anyone with inside information to buy or sell stocks based on their unique perspective or special knowledge.

    2) Fraud - fraud claims against companies often deal with their public offerings (which is when a company's stock is "offered" for sale to the public) and documents related to such offerings. Specific claims of fraud can be brought regarding financial statements (ahem, Mr. Conaway), initial public offerings (IPOs), takeovers, and accounting practices.

    3) Market Manipulation - Yep, manipulating markets is no good. This usually happens when someone acts to create a false impression regarding a security, its trading activity or pricing, or other similar information.

Abuses by Securities Brokers-Dealers

Both individuals and firms involved in buying and selling securities have to follow the rules on investing and investment advice. Common issues arising for broker-dealers are:

    1) Churning - Kind of like it sounds, making too many trades to incur excessive commission fees is not cool.

    2) Unauthorized Trading - Brokers need to follow their clients directions and get approrpriate permission when making trades.

    3) Misrepresentation and Omissions - Similar to fraud, misrepresentations and omissions occur when a firm or broker purposefully give out wrong information, or conceal correct information.

    4) Unsuitability - Brokers can't make inappropriate investment recommendations. This doesn't mean that they can't mistakes or that investments must be successful, of course, but brokers should make recommendations appropriate to a particular investor's interests/needs.

    5) Misappropriation - In just about any context, taking someone's money and keeping it for yourself is not legal, and that goes for brokers too. As a sidenote, investment firms can and have sometimes been held liable for their individual brokers' misdeeds of this type.

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