NCJ Number
214592
Journal
American Criminal Law Review Volume: 43 Issue: 2 Dated: Spring 2006 Pages: 921-989
Date Published
2006
Length
69 pages
Annotation
This overview of Federal statutes that define and punish securities fraud addresses elements of the offense, likely defenses, enforcement mechanisms, penalties, and recent developments.
Abstract
Securities fraud is regulated primarily through the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 act regulates the primary market, and the 1934 act regulates the secondary market. They have a common objective, however, which is to ensure vigorous market competition by requiring the full and fair disclosure of all material information in the marketplace. The two main types of fraud in securities violations are material misrepresentations and/or omissions, and insider trading. Any false statements made in connection with the purchase or sale of securities constitute an offense. An insider-trading violation involves the use of material, nonpublic information in purchasing or selling any security in breach of a fiduciary duty. The U.S. Supreme Court has ruled that there are two separate fiduciary relationships that can be the basis for an insider trading violation. The first is the relationship between corporate "insiders" and the corporation's shareholders, which is known as the classical theory of insider trading. The second is the relationship between corporate "outsiders" and the "inside" source of the material, nonpublic information, which is known as the misappropriation theory. There are two broad categories of securities fraud defenses: intent-based defense, which attempts to show that the defendant acted without the intent to violate the law; and reliance-based defenses, which attempt to show that no market participant relied upon the defendant's omissions or misrepresentations in deciding to purchase or sell a security. The discussion of enforcement mechanisms focuses on enforcement by the Securities and Exchange Commission and by the U.S. Department of Justice. The article concludes with discussions of penalties and recent developments. 476 footnotes