Defense Considerations

Like many other types of financial fraud, the web of offenders in securities fraud can include stockbrokers, promoters, traders, accountants, and lawyers. Professionals like these working together can defraud stockholders out of billions of dollars. Although the idea of boiler room schemes pushing worthless penny stocks upon unsuspecting victims comprises part of the problem, the SEC and federal courts have imposed both civil and criminal sanctions upon such diverse groups ranging from organized crime rings to high school students.

The four most prevalent types of securities crime include "churning", insider trading fraud, outsider trading, and "pump and dump" fraud.

Churning refers to the buying and selling of stock in order to generate commissions for the stockbroker at the expense of client's profits.

Insider trading refers to the misappropriation of nonpublic information. While the original statutes made it illegal for employees to directly benefit from market-sensitive information, the definition of insider trading has been expanded to disallow sharing privileged information to a third party who might buy shares in the company.

Outsider trading evolved from insider trading laws. The United States Supreme Court first recognized a form of outsider trading in the 1997 case United States v. O'Hara. The court in that case applied what they called the "misappropriation theory." The misappropriation theory, "subjects individuals who trade on material, non-public information to prosecution, regardless of whether they worked for the company whose stock was being traded or otherwise owed the corporation's shareholders a fiduciary duty."8 While originally involving a strict interpretation of the Securities Exchange Act,Decisions from cases before O'Hara in the early eighties limited the criminal liability of outside traders to only those instances in which the outsider should have known that the information resulted from a breach in the first place.

One of the most common Internet scams is one of the oldest investment schemes of all time: the "pump and dump" scam. Historically "pump and dump" schemes are run out of makeshift offices staffed with fast talking telemarketers that convince innocent investors to buy debatable stock. The high pressure sales tactics generate enough demand to push up the share price of stock. This phase of the scheme is known as, the "pump". The "dump" occurs when the price of the stock reaches a specific objective and the operation that was originally encouraging investors to buy, sells its shares for a significant profit. The sell-off will also lower demand and consequently the share price, leaving unsuspecting investors with a loss.

Using online investment newsletters positioned as objective to the trade, and which promote the purchase of specific securities may constitute another form of investment fraud.

If you are facing potential securities fraud charges, it is critical that you use a legal defense team with specific experience and expertise dealing with these types of charges. Call us at any time at (800) 459-2500 for a free, confidential initial consultation. Early intervention is critical to obtaining the best results.