Individuals, companies, and firms involved in all aspects of the securities industry face litigation risks daily. From whistleblower lawsuits and U.S. Securities and Exchange Commission (SEC) enforcement actions to Financial Industry Regulatory Authority (FINRA) arbitration and private-right-of-action cases under the Securities Exchange Act of 1934, all types of securities litigation present risks for civil liability. In some cases, securities litigation can present risks for criminal penalties as well.  

With this in mind, there is a lot that brokers, company insiders, investment advisers, and others need to know when targeted in lawsuits and investigations. When brokers, company insiders, and others make informed decisions based on the advice of experienced counsel, they can significantly mitigate their risk in both private and governmental securities litigation.  

“Securities litigation can present substantial risks for individuals, companies, and firms. Whether facing allegations in civil litigation, SEC enforcement proceedings, or FINRA arbitration, the key to mitigating these risks is to build and execute a comprehensive, strategic and forward-thinking defense.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C. law firms. 

Answers to 10 Frequently Asked Questions (FAQs) about Securities Litigation  

Here are answers to 10 frequently asked questions (FAQs) about securities litigation:  

1. What Are Some of the Most Common Claims Against Brokers and Brokerage Firms in Securities Litigation?  

Brokers and brokerage firms have faced a growing volume of litigation in recent years. This includes private litigation involving individual investors as well as litigation involving the SEC. Investigations, lawsuits, and arbitration filings targeting brokers and brokerage firms primarily focus on acts and omissions constituting investor fraud, though brokers and brokerage firms can face a variety of other claims in securities litigation as well.  

Some examples of common claims against brokers and brokerage firms in securities litigation include:  

• Making unsuitable investment recommendations 

• Unauthorized trading and account churning  

• Charging excessive fees and commissions 

• Failing to disclose or misconstruing material information (especially in connection with structured products and other high-risk investments)  

• Failure to supervise or implement adequate internal controls 

2. What Are Some of the Most Common Claims Against Company Insiders and Issuers in Securities Litigation?  

Securities fraud lawsuits and enforcement actions targeting company insiders and securities issuers can also involve an extremely broad range of allegations. These cases are typically very different from those targeting brokers and brokerage firms; and, while both falls under the umbrella of “securities litigation,” the resemblances between the two categories are minimal. Some examples of common claims against company insiders and issuers in securities litigation include:  

• Accounting and recordkeeping violations 

• Submitting false SEC filings  

• Insider trading 

• Market manipulation  

• Selling unregistered securities and conducting unregistered IPOs 

3. What Are Some of the Most Common Triggers for Securities Fraud Lawsuits and Investigations?  

Many securities fraud lawsuits and investigations result from investor complaints. Typically, investors will have concerns about losses in their portfolios that they believe cannot be explained by ordinary market forces. These concerned investors will contact plaintiffs’ lawyers to help them file claims alleging fraud in federal courts, district courts or FINRA arbitration.  

In some cases, concerned investors will file whistleblower claims with the SEC. The SEC has an obligation to investigate all whistleblower complaints that meet the basic filing requirements, and SEC whistleblowers can receive substantial compensation awards.  

The SEC also initiates investigations on its own. Questionable EDGAR filings, market activity, media reports, and referrals from other federal law enforcement agencies can all trigger SEC investigations that may lead to civil or criminal enforcement action. The SEC also monitors activity on social media and other online platforms, and activity on these platforms is increasingly serving as the basis for SEC enforcement activity.  

4. What Types of Claims Are Most Likely to Lead to Class Action Securities Litigation?  

While all securities litigation presents liability risks for the individuals or entities targeted, companies and firms targeted in class action litigation face risk on an entirely different scale. Class action lawsuits lead to devastating liability that can threaten companies’ and firms’ viability as a going concern.  

The types of claims that are most likely to lead to class action securities litigation are those that involve violations affecting large groups of investors. Inadequate brokerage controls that lead to systemic unsuitable investment recommendations, omitting material information from companies’ 10-K or 10-Q filings, mismanagement of investors’ funds, and market manipulation resulting in widespread losses are all examples of issues that can lead (and have led) to securities-related class action lawsuits.  

5. How Does the SEC’s Whistleblower Program Work?  

The SEC’s Office of the Whistleblower accepts tips from company employees, investors, and others who believe they have information about securities fraud. When a whistleblower complaint spurs enforcement action resulting in sanctions of $1 million or more, the whistleblower can receive between 10% and 30% of the amount collected.  

As a result, individuals have a strong financial incentive to come forward and work with the SEC. Additionally, even if the SEC declines to pursue enforcement action based on a whistleblower’s tip, the whistleblower can still choose to pursue a claim directly, and whistleblower compensation awards are higher in these cases. Due to these incentives, whistleblower litigation is a key component of the SEC’s overall securities law enforcement strategy.  

6. When Is It Advantageous to Settle a Securities Fraud Lawsuit or Arbitration Claim?  

When facing substantiated allegations of securities fraud, settling will often prove to be the most cost-effective solution. However, targeted individuals and entities must be careful not to settle too soon, as there are numerous ways to fight securities fraud allegations even in scenarios that seem highly unfavorable (more on this below).  

So, when is it advantageous to settle? Simply put, the costs of settling need to be less than the costs of any other alternative. This includes not only legal costs and any potential judgment liability, but reputational and administrative (i.e. suspension or debarment) costs as well.  

7. When Can the U.S. Department of Justice Pursue Criminal Securities Fraud Litigation?  

The U.S. Department of Justice (DOJ) pursues criminal securities fraud litigation in cases involving intentional (or apparently intentional) securities law violations. According to the DOJ’s website, the Department’s Market Integrity and Major Frauds (MIMF) Unit, “focuses on the prosecution of complex securities, commodities, cryptocurrency, and other financial fraud and market manipulation cases.” In criminal securities fraud cases, the DOJ can seek penalties ranging from substantial fines to long-term imprisonment for company executives and other insiders.  

8. What Remedies Can Investors Seek in Securities Litigation?  

In private securities litigation and FINRA arbitration, retail investors can seek compensatory damages for their fraudulent investment losses. An investor’s losses may be deemed fraudulent if they result from either: (i) broker fraud or mismanagement (i.e., making unsuitable investment recommendations), or (ii) a drop in the value of their securities that is not attributable to ordinary market forces. Along with the recovery of their lost principal and investment earnings, investors can seek to recover interest, fees, and other costs as well.  

9. What Remedies Can the SEC Seek in Securities Litigation?  

When pursuing enforcement actions against brokers, brokerage firms, company insiders, and issuers, the SEC can seek a range of civil and administrative penalties. These include fines, disgorgement, and restitution as well as cease-and-desist orders, suspension, and debarment from the securities industry.  

10. What Defenses Can Individuals, Companies, and Firms Use to Protect Themselves in Securities Litigation?  

While securities litigation can involve a broad range of allegations and present substantial risk for liability and other penalties, targeted individuals and entities may be able to successfully defend themselves by several means. Whether securing a favorable result means avoiding liability entirely or negotiating a favorable settlement, the key to success is making informed decisions in light of the available opportunities.  

For brokers and brokerage firms, some examples of potential defenses include: 

• Misguided Allegations – In many cases, investors (and their counsel) simply lack an adequate understanding of the law. Demonstrating that an investor’s allegations are misguided can serve as an efficient and complete defense against liability.  

• Investor Authorization – One particular area of confusion for many investors is the area of authorization (including discretionary authorization). If an investor is challenging a trade that he or she authorized, providing documentation of authorization can be sufficient to avoid liability.  

• Statutory and Regulatory Compliance – Brokers and brokerage firms will also be able to successfully defend against securities fraud allegations by demonstrating compliance with the relevant statutes, regulations, or FINRA rules.  

For company insiders and issuers, some examples of potential defenses include:  

• Compliance with Pre-Arranged Trading Plans – In cases involving insider trading allegations, company insiders can avoid liability by demonstrating compliance with a pre-arranged trading plan.  

• Good-Faith Disclosure – Issuers accused of withholding material information or publishing incomplete or misleading information can often defend against fraud allegations by demonstrating good-faith efforts to maintain disclosure compliance.  

• Qualifying for a Registration Exemption – Issuers can qualify for registration exemptions in various scenarios. If security is exempt, then offering security without registration is 100% permissible. 

The fact that these are just examples cannot be overemphasized. Securities litigation can involve an extraordinarily broad range of allegations under numerous laws, rules, and regulations. In many cases, targeted companies and individuals will be able to assert a successful defense by focusing on discrete elements of the plaintiff’s or SEC’s burden of proof. From asserting the applicable statute of limitations to preventing class certification, several technical defenses can prove highly effective in securities litigation as well. As with all types of litigation, the key is to explore all viable defenses, build a comprehensive and cohesive defense strategy, and then execute that strategy while remaining prepared to adapt as necessary.