To understand securities litigation, we must understand securities fraud. According to California Corporations Code § 25401, any security sale or purchase which uses an “untrue statement of a material fact” (or a misleading omission of a material fact) constitutes securities fraud. In other words: if someone lies while buying or selling securities in California, they’ve committed securities fraud.

Pump and Dump schemes are a common example, and large-scale “creative accounting”—like the kind unveiled in the Enron Scandal—is another. In such instances and others, the government or victims may pursue litigation.

Securities Litigation

Securities litigation refers to legal action against those who’ve allegedly committed securities fraud. This can mean a lawsuit from the Securities and Exchange Commission (SEC), a class action filed on behalf of harmed shareholders, and/or criminal proceedings. In these cases, the defendants risk everything from business disruption and reputational damage to monetary damages or even criminal charges.

SEC and DOJ Enforcement Actions

Like many forms of litigation, securities litigation involves an investigation. When the SEC’s Enforcement Division gets involved, they can gather evidence through informal inquiry, examining records and data, and interviewing witnesses.

If the SEC deems security fraud has taken place, they can pursue several legal actions. They can file an injunction against the perpetrating party to prohibit further violations, seek monetary penalties and/or disgorgement, and/or bar an individual party from serving in certain high-ranking corporate positions.

The SEC may also refer a case to the Department of Justice (DOJ). If the DOJ pursues criminal litigation and finds the defendant guilty, they are subject to fines, imprisonment, or both. Federal sentencing guidelines advise the severity of punishment should correlate with the amount of loss, so the more monetary loss the guilty party caused, the worse their punishment.

Private Civil Proceedings and Class Action Suits

Like all lawsuits, securities suits begin with a plaintiff’s complaint, then—if the judge doesn’t dismiss the case—it proceeds to discovery. If the parties don’t settle, then the suit goes to trial.

While individual victims can file suit for securities fraud, most securities suits are class actions. In these cases, the class is usually anyone who suffered damages from the alleged fraud. If they win their suit, they’re entitled to recovery.

Conclusion

Securities litigation is a broad and complicated subject. If you find yourself involved in such legal action, the process can take years. In such instances, it’s important to prepare yourself with thorough investigation and forensic accounting.

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Pump and Dump schemes are a common example, and large-scale “creative accounting”—like the kind unveiled in the Enron Scandal—is another. In such instances and others, the government or victims may pursue litigation.