Litigation is defined as legal contest, a dispute or an action brought in court to enforce a legal right. Securities litigation merely refers to disputes, the subject matter of which concerns securities or the construction or interpretation of state or federal securities laws. The Securities Act of 1933, the Securities Exchange Act of 1934, and almost without exception state securities laws, contain anti-fraud provisions.
The Securities Act of 1933
The Securities Act of 1933 generally only relates to the registration or issuance of securities. For example, unless exempt from registration, it is illegal and actually a criminal offense to sell unregistered securities or securities whose registration has not been approved by the US Securities & Exchange Commission. The Securities Act also provides for civil penalties in connection with the execution of a false registration statement, or the use of written materials of any kind, containing false or misleading statements in connection with the initial sale or distribution of securities.
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934, as a general matter only relates to conduct of broker dealers and the regulation of securities after they are sold, the anti-fraud provisions of which generally provide that it is unlawful to make false or misleading statements in connection with the sale of securities, provided of course, as modern jurisprudence would have it, the misstatement or omission was material, or important, assuming significance to the reasonable investor, the misstatement was made with the state of mind embracing the intent to deceive or defraud, or at least reckless, was justifiably relied upon by the investor, and actually was the cause of the damage or losses to the investor.
However, under both the Securities Act of 1933 and the Securities Exchange Act of 1934, the private right of action by investors to bring claims is generally limited to the anti-fraud provisions of both acts. Only the government can bring claims or actions for the violation of other provisions of both acts. As a result, many Courts have found claims relating to the failure to supervise, or the sale of unsuitable investments for which no private right of action technically exists, as cognizable under the anti-fraud provisions of the Exchange Act, under the theory that under Section 10b, the failure to disclose that a broker is unsupervised or an investment is unsuitable is an omission of material fact.
Similarly, the violation of self-regulatory rules or FINRA Conduct Rules generally might not create a private cause of action, but under all instances, the violation of these rules, i.e. the minimum standard under which brokers and brokerage firms may conduct itself, support a private right of action for negligence and a breach of these duties.
State law, even among states adopting the Uniform Model Securities Acts, varies. State law, or blue sky law, related to the issuance of securities is generally modeled after the Securities Act of 1933. Most states, with the exception of perhaps New York, provide for a private right of action for the violation of registration requirements or anti-fraud provisions of the state’s securities acts in connection with the issuance of securities, generally without regard to whether these misstatements were intentional.
Also generally, most states adopting the Uniform Model Securities Act, contain anti-fraud provisions which are analogous to the anti-fraud provisions of the Securities Exchange Act of 1934, and which provide for civil liability for misstatements and omissions or material fact in connection with the sale of securities. However, some states only provide that only the state can pursue these violations and no private right of action exists. At least one state, Pennsylvania only allows these claims against issuers and not stockbroker intermediaries, and yet in other states, states that provide for enhanced remedies such as statutory interest, attorney’s fees, or in some cases treble or triple damages, also provide that the prevailing party is entitled to legal fees, which, when invoked, have been construed to mean if the investor does not win, the investor may be required to pay the brokerage firm’s legal fees.
In any event, litigation is litigation, securities arbitration is litigation. In the case of securities arbitration instead of having your dispute or contest heard by a court, your contest or dispute involving the violation of state or federal securities laws, state consumer protection laws, elder abuse laws, or for negligence, breach of fiduciary duty, or plain old fraud, (based upon the contract you signed when you opened your brokerage account) are decided by a panel of securities arbitrators.