Securities Fraud: Understanding Secondary Liability for Misstatements
Securities Fraud: Understanding Secondary Liability for Misstatements
Securities fraud is a big deal. It’s when companies or people lie about important stuff to trick investors. Not cool. But it happens. When it does, folks can get in big trouble with the law. Especially if they knew about the lies and didn’t speak up. That’s called “secondary liability.” Let’s break it down so regular folks can understand.
First, companies gotta follow rules about what they say about themselves. It’s called “disclosure.” The main law is the Securities Act of 1933. It says companies gotta tell the truth when they sell stocks and bonds. No lying or leaving stuff out. Seems obvious but you’d be surprised.
If a company lies, that’s called securities fraud. The main law for that is the Securities Exchange Act of 1934. It says you can’t trick investors by lying about important stuff. Things like:
- How much money the company makes
- New products or projects
- Financial problems
Get caught lying and you could end up in court, paying huge fines. Not fun.
Who can be liable for securities fraud?
Obviouslly the company itself can be liable. Duh. But sometimes individuals can be on the hook too. Executives, board members, lawyers, accountants. If they knew about false info getting out and didn’t stop it. That’s called “secondary liability.”
Secondary liability means you didn’t make the false statements yourself. But you knew about them and didn’t do anything. Just as bad in the law’s eyes.
How does secondary liability work?
There’s a few ways folks can get secondary liability for securities fraud:
1. Aiding and abetting
This is when you actively help with the fraud. Maybe you help cook the books or spread false info. Not good. Courts can nail you for aiding and abetting securities fraud. Even if you weren’t the main guy making false statements.
2. Control person liability
This catches higher ups who control the show. Say a CEO or CFO knows lower guys are lying to investors. But they don’t stop it. Bam – control person liability. They controlled the operation so they’re on the hook.
3. Reckless conduct
You can also get secondary liability by being reckless. Maybe you suspect false info is going out but bury your head in the sand. Not okay. The law says you gotta speak up if something seems fishy.
In one famous case, accountants got nailed for recklessness. They suspected shady stuff but didn’t dig deeper (TSC Industries v. Northway, Inc.). Gotta be proactive!
What are the defenses against secondary liability?
Sometimes people accused of secondary liability have good defenses. Common ones include:
- “I didn’t know!” – Hard to prove you actually knew about the fraud.
- “I didn’t help!” – If you really didn’t do anything to assist.
- “I tried to fix it!” – If you took steps to correct the false info.
But these defenses don’t always work. The law expects folks to be vigilant against fraud. Even lower level guys with no control. Moral of the story: speak up about sketchy stuff. Keep those lips loose. Don’t get sucked into shady business.
Securities fraud is real and can take down companies and careers. Watch your back and don’t stay silent if you suspect lies. That’s how regular folks like you and me can help keep markets honest. Peace out.