Corporate executives and other individuals who find themselves being investigated for securities violations are bound to have serious and pressing questions that need answers right away. The penalties for a securities violation are steep. They can carry substantial civil and even criminal liability, and can imperil your professional future if you are a securities professional or broker. However, the investigation process is not always intuitive or familiar.
Here are eight questions that attorney Nick Oberheiden has been frequently asked by his securities clients in the initial phases of his legal representation.
1. Is Securities Litigation Only for Brokers and Securities Professionals?
While many securities litigation cases do center on brokerages and investment professionals, they are not the only parties that can be involved. Anyone who owns a security or is involved in a transaction or a dispute that involves a security can be the subject of this type of litigation.
Some common cases that do not have to involve securities professionals include:
- Class actions by shareholders
- Shareholder derivative claims
- Mergers and acquisitions (M&As)
- Corporate control issues
- Corporate takeover attempts, including hostile takeovers
- Litigation surrounding an initial public offering
In addition, securities litigation also covers a wide variety of white collar crimes, including:
- Accounting fraud
- Securities fraud
- Insider trading
As you can see, a wide variety of people can be involved in securities litigation—on both sides of the case. Some of them will be corporate entities, such as:
- Multinational conglomerates
- Limited liability companies (LLCs)
- Political action committees (PACs)
- Public or quasi-public agencies
- Law enforcement agencies
Others will be individual people, such as:
- Chief executive officers (CEOs)
- Corporate board members
- Other corporate officers, like chief financial officers (CFOs)
- LLC members
- Corporate accountants
- Contractors of the company
- Classes of shareholders
2. Is Securities Litigation Civil or Criminal?
Depending on the circumstances, securities litigation can be civil, criminal, or even administrative.
In rare cases, securities litigation is criminal. These often involve fraud or another form of white-collar crime, like insider trading. When these allegations are pursued as a criminal offense, jail time becomes a possibility, with sentences ranging from a year to multiple decades behind bars, depending on the offense. However, most securities crimes require prosecutors to prove that you had the specific intent of defrauding people in order to secure a conviction. This can be difficult to do because it requires evidence of your state of mind. Evidence of your intent is usually shown indirectly, through courses of conduct that suggest, but do not prove, your intent at the time.
Because of this difficulty, securities litigation is more likely to be civil. While jail time is not on the table in civil cases, that does not mean that the penalties of a judgment will be light. Many civil securities litigation judgments carry crippling financial penalties, usually in the forms of compensation, restitution payments, civil fines, and sometimes treble damages. As important, many securities litigation cases that are pursued as civil allegations do not require the plaintiff to prove any intent, at all. Accidental or even unknowing violations of securities laws can lead to substantial civil judgments. This is why it’s important to get the best securities litigation attorney on your side as early in the process as possible.
Finally, there are some securities litigation cases that are pursued administratively, often by the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) against the securities professionals that they regulate. These administrative agencies have oversight responsibilities and rulemaking powers in the securities world. If one of the professionals within their jurisdiction violates one of those rules, the agency can file an administrative complaint against the alleged wrongdoer and levy the penalties within the agency’s powers against him or her. These penalties are confined to financial penalties and the powers that the agency has over the professional—for example, serious violations of securities laws can lead the SEC to fine a regulated broker and forbid him or her from ever selling securities, again.
While criminal cases are obviously the most severe, civil or administrative sanctions are far from trivial. They can still cripple your finances and upend your life.
3. How Does Multidistrict Litigation Work?
Multidistrict litigation (MDL) is a common way to cope with large-scale civil securities litigation cases. It is similar to a class action. But rather than the entire class action moving forward toward trial, individual cases that represent the whole are chosen instead as bellwether cases to go to trial. The outcomes of those cases are then used by the plaintiffs and the defendants to try to settle the ones that remain.
MDLs form slightly differently from a class action. In a class action, attorneys for the plaintiffs seek out other victims who have suffered from the defendant’s same course of conduct. They then file a class action—a single lawsuit with hundreds or sometimes even thousands of similar victims—against the defendant. In an MDL, courts take cases that have been filed against the defendant from across the country, and that involve the same basic set of facts, are then consolidated into a single courthouse, in front of a single judge. That judge then presides over the discovery phase, whereby each side’s attorneys gather evidence that supports their case.
Occasionally, once discovery is done, the MDL splits apart and the individual cases go back to the courts where they were first filed. More often, though, the MDL stays together and the attorneys and the presiding judge select a small number of individual cases out of the MDL that best represent the cases in the MDL as a whole. Those cases are then brought through a trial, all the way to a jury verdict. The outcome of these trials, known as bellwether trials, gives the plaintiffs and the defendant a better idea of what the outcome would be for the remaining cases. This helps the sides reach a settlement.
A good example of an MDL in action is the case involving the herbicide Roundup causing cancer. By June 2020, around 125,000 plaintiffs had joined the MDL. Out of these, three cases were selected for bellwether trials. Based on the outcomes of those trials, the defendants settled the existing cases for more than $10 billion.
While MDLs are frequently used for products-liability claims, like the Roundup case, many securities litigation cases use the MDL process as well. The plaintiffs in these securities cases end up having much in common with the alleged victims in products-liability claims: They all claim to have suffered because of a single action taken by the defendant. In products-liability claims, that action was the poor design, manufacture, or marketing of a product. In securities litigation, that action is something like:
- A breach of fiduciary duty;
- Concealing or omitting material facts from investors;
- Trading on nonpublic information; or
- Manipulating stock prices.
4. Which Federal Agencies Can Be Involved?
Federal law enforcement and oversight agencies are frequently involved in civil cases, as well as in administrative and criminal actions. Some of the most common agencies to be involved in a case include the:
- Securities and Exchange Commission
- Federal Bureau of Investigation (FBI)
- Department of Justice (DOJ)
- Financial Industry Regulatory Authority
- Consumer Financial Protection Bureau (CFPB)
- Commodity Futures Trading Commission (CFTC)
- Federal Trade Commission (FTC)
In many cases, multiple agencies will be involved in the investigation of a single securities litigation case.
These are among the largest and most powerful law enforcement agencies in the entire world. When they set out to investigate a potential securities violation, the potential for significant legal liability increases dramatically. Finding a securities litigation attorney with a background at the DOJ may improve your defense since they understand the primary tactics used by the government.
5. How Is “Fraud” Defined?
Fraud is generally defined as an intentional use of deception or misrepresentation to deprive someone else of something valuable, such as money or a security.
In many securities litigation cases, the presence of fraud is the difference between a civil or administrative case and a criminal charge. Individuals and companies can be sued and held civilly liable for securities violations that happened accidentally, without their knowledge, or even in spite of their best efforts to avoid them. This is due to the fact that between an innocent victim and a negligent party, the law always sides with the innocent victim. Even if you were negligent in causing someone else’s harm or financial losses, securities law will hold you liable and force you to compensate the victims for what they have lost as a result of your negligent conduct or omission.
Once evidence of fraud has been found, though, the case can quickly become criminal in nature. No longer were the alleged financial losses suffered by the victims a result of negligent conduct or a mistake—they may have been deliberately inflicted by the defendant for its gain. This type of conduct is pursued as a criminal offense that can carry significant prison time.
6. Is a Lack of Intent a Good Defense Strategy in Securities Litigation Cases?
Due to the difference between intentional and unintentional conduct, it may make it seem like it would always be a strong defensive strategy to claim that you had no intent to commit the alleged securities violation.
That is not necessarily the case.
On the one hand, claiming that you lacked the intent to defraud someone or to commit another sort of securities violation is rarely a good defense to make when the allegations are being pursued in civil court or as an administrative action. These cases do not generally require intentional conduct. You can be held civilly liable or face administrative sanctions, even if it were clear and undisputed that you were negligent or simply mistaken. In these cases, the level of your intent is irrelevant, so relying on a lack of intent as a defense will not get anywhere.
On the other hand, relying solely on a lack of intent defense to a criminal allegation of securities fraud or other securities violation is still not a good idea.
While securing a criminal conviction for a securities violation generally requires proof that you had the specific intent of defrauding someone, there is nothing to prevent law enforcement personnel from dropping a criminal case and turning it into a civil one. Many allegations of securities violations change from civil to criminal, or vice versa, at some point during the investigation as evidence of intent appears or fizzles. If your securities litigation lawyer relies solely on the argument that you lacked the intent to commit the crime, you silently admit to the underlying conduct. While you may be effectively fighting off a criminal allegation, your defense may have the practical effect of admitting to all of the elements required in a civil case. This can expose you and your company to significant civil liability, and the financial penalties that come with it, in exchange for taking jail time off the table.
7. How Likely Is It for a Civil Securities Litigation Case to Go to Trial?
Similar to other civil cases, securities litigation lawsuits hardly ever make it all the way to trial. The vast majority of them settle out of court as the plaintiffs and defendants reach a mutually agreeable resolution.
However, when the amount in dispute is so high that even a settlement could cripple the defendant’s business or send it into bankruptcy, the odds that the case goes to trial increase significantly.
8. How Important Is It to Be Represented by an Experienced Securities Litigation Attorney?
It is extremely important for you to be legally represented by a securities litigation lawyer rather than a general defense or plaintiff’s attorney. This is true regardless of which side of the lawsuit you are on.
Securities law is notoriously complex. It is also extremely document-heavy, with many cases involving discovery requests that cover millions of individual documents, some of which are thousands of pages long. The amount of data that securities firms and professionals generate on a daily basis is shocking to many who do not routinely practice in the field.
If you are facing allegations of a securities violation—whether they are civil, criminal, or administrative—getting a defense lawyer that handles securities cases is paramount. The evidence that gets used in these claims is very different from other types of criminal charges or civil lawsuits. Defense lawyers who are not familiar with the field often struggle. They also rarely have the foresight necessary to protect you and your company’s interests from liability in anything beyond the very near future.
If you have suffered financial losses and think that they were due to securities violations, it will not do to have just any plaintiff’s attorney. Uncovering evidence of wrongdoing by securities professionals or firms is far more demanding than one would expect. It also generally involves combing through reams of documents that were produced in discovery—a practice that very few plaintiff’s lawyers are familiar with doing if they do not routinely handle complex litigation and securities cases.
If you have further questions about securities litigation, please reach out to Dr. Nick Oberheiden of Oberheiden P.C. for more information.
Dr. Nick Oberheiden is a securities litigation defense attorney and the founding partner of the national law firm Oberheiden P.C. He has represented numerous regulated securities professionals and executives–from corporate entities to the individuals who work for them–and has guided them through the complicated process while preserving their rights and interests.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.