Curious about what a securities lawyer does? Keeping up with the stock market’s constant changes isn’t easy for most investors. Evolving regulations and global economic turmoil add to the challenge.
Securities laws create the framework for stable capital markets. Ideally, they prevent fraud without stifling innovation or restricting capital flow across borders.
Every day, billions of dollars move through stock and bond trades, while IPOs raise millions for companies accountable to shareholders.
Whether significant pension funds or individual investors, shareholders rely on companies to be honest about their financial health, especially during an IPO.
Working with a securities lawyer
Securities lawyers are at the core of public company finance, drafting the extensive paperwork that keeps capital markets running. But what exactly do they do? Their work spans significant stock exchanges like the NYSE to the high-risk world of penny stocks.
Securities law covers various legal works in Canada, the U.S., and Europe. Some lawyers facilitate billion-dollar deals, while others investigate companies that mislead investors to raise millions.
They handle mergers, acquisitions, and due diligence on stock offerings. On the litigation side, they prosecute or defend companies in securities class actions and shareholder lawsuits involving fraud or misrepresentation.
Securities and Exchange Commission
Securities lawyers also handle arbitration cases between broker-dealers and clients under the Financial Industry Regulatory Authority in the U.S.
They navigate regulations from state, federal, and provincial agencies, including the U.S. Securities and Exchange Commission, which enforces some of the world’s most powerful financial laws.
Many law school graduates aim for careers in securities law because of their high earning potential. Over time, they may work on IPOs and even trade securities themselves.
Public companies must operate transparently and disclose accurate financial information to investors. Misrepresenting financials in disclosure documents or IPO prospectuses can lead to shareholder lawsuits and lengthy court battles.
Securities class actions involve individual, corporate, and institutional investors, such as public pension funds, who can sue a company for misleading statements.
On a smaller scale, disputes between stockbrokers and clients are often resolved through binding arbitration—private arbitrators, much like judges, issue legally enforceable decisions. Complaints against broker-dealers are common, and securities lawyers work to prove or dismiss claims in arbitration hearings.
While individual investors and small firms deal with arbitration, the most publicized legal battles in securities law involve significant class actions and regulatory enforcement in public company finance. These high-stakes cases shape market integrity and corporate accountability.
How a Securities Lawyer Can Help
Beyond litigation, securities law is crucial in IPOs and significant mergers. Transactional securities lawyers help companies comply with securities regulations, whether a private firm is preparing to go public or a corporation is acquiring a competitor.
They draft stock offering documents and ensure all disclosures meet federal and state securities laws and stock exchange rules, reducing the risk of regulatory issues.
Securities regulation and the stock exchange
A corporation’s securities lawyer is obviously out to protect the interests of the client company. Still, individual investors might also need a securities lawyer, especially if their portfolios get decimated after being assured by a broker of an investment’s safety, for example.
Securities lawyers working on behalf of investors can vet corporate disclosure materials, investigate key corporate players in a company’s management, and find out about any past litigation or legal troubles before people decide to park their money.
Suppose things go wrong, and investors end up losing money despite assurances by company management or by shady stock brokers. In that case, securities lawyers can spring into action and find out if fraud, negligence, or mismanagement is involved rather than just lousy investment luck.
If, for example, your investment portfolio drops significantly, that loss could result from market forces over which a company or broker has no control. However, they could also result from negligence, mismanagement, fraud, or other misconduct that can entitle investors to damages in court actions or arbitration proceedings.
What does a securities lawyer do?
Securities lawyers handle a variety of cases where money is lost to the ether of the market, such as:
- Breaches of fiduciary duties by a company’s executive leadership.
- Negligent conduct by stockbrokers and dealers results in investment losses.
- Supervisory failures by broker-dealers that cause unsuitably risky trades on accounts with low-risk profiles.
- Misrepresentation in corporate disclosure documents or wrongful errors of omission that give an inaccurate picture of a firm’s actual financial state.
- Securities fraud, insider trading, abusive or “naked” short selling, or unlawful market manipulation.
- Improper or unauthorized trading on client accounts, including investments in unsuitable instruments according to a client’s instructions or risk tolerance.
Securities fraud, class actions, and shareholder derivative lawsuits
With the onset of the 2008 financial crisis, which saw the devastating collapse of derivative and asset-backed mortgage securities markets, the resulting fissures in the financial world exposed some of the most brazen and audacious corporate frauds ever perpetrated.
Indeed, the 21st century has seen some of the most significant corporate securities fraud cases involving billions in losses to shareholders and significant institutional investors, exposing weak regulations and ineffective laws in their wake.
In September 2008, shareholders in the energy firm Enron were awarded $7.2 billion in a years-long legal battle after the company collapsed in a scandal back in 2001. It was the most significant securities fraud settlement in history, and the firm leading the case, for its part, got $688 million.
Securities litigation and bankruptcy
However, the money only got doled out to investors who bought Enron stock between 1997 and 2001, and the lead plaintiff in the case happened to be the University of California, which claimed to have lost $145 million when the company went bankrupt. The class actions against Enron also sought to hold the banks behind the firm accountable for their role in enabling the company before it imploded.
The accounting scandal that brought down Enron, where losses and bad debts were hidden using dubious accounting tricks, led to significant reforms in U.S. securities laws, including the passage of the Sarbanes-Oxley Act and the establishment of the federal Public Company Accounting and Oversight Board.
The Sarbanes-Oxley Act sought to stamp out the type of corporate malfeasance that led to the multi-billion-dollar losses from Enron’s downfall, where its stock price went from highs over $90 before bottoming out at about $0.26.
In particular, the law forbade companies from using accounting wizardry to hide so-called off-balance sheet transactions while also strengthening protections for whistleblowers and employees who sound the alarm about corporate shenanigans like those at Enron before its spectacular and costly failure.
Use a securities lawyer to deal with fraud
The company’s chief executive officer, Jeffrey Skilling, was eventually indicted on nearly three dozen criminal charges, including fraud and insider trading, for which he was sentenced to prison for 24 years in October 2006. Skilling reportedly spent millions on his defence, and numerous appeals failed to absolve him for his role in Enron’s rise and fall.
However, Skilling was released from prison in 2019 and has since launched another company with people he used to work with at the controversial consulting firm McKinsey & Co. The company’s former chief financial officer, Andrew Fastow, who cooperated with federal authorities in their investigation of Enron, served five years in prison on wire and securities fraud charges and was released in 2011. Reportedly, he’s since made a career on the public speaking circuit.
Shortly after the catastrophic failure of Enron, the next domino to fall was a company called WorldCom, a long-distance phone and internet service provider. Over three years, executives at the company had been cooking the company’s books by painting a rosy financial picture of profitability and long-term health.
Whistleblowing employees
WorldCom and other telecom giants were fading as the world moved toward wireless technology in the early 21st century. Like Enron, a whistleblower exposed what became one of the biggest corporate accounting scandals ever.
The employee grew suspicious of how the company recorded expenses and saw inflated assets and revenues. Internal auditors investigating these concerns found billions in questionable balance sheet entries.
When the audit committee chair alerted the SEC, investigators uncovered the full scope of the fraud. WorldCom had overstated its assets by $11 billion over several years.
In July 2002, the company went bankrupt, wiping out billions in shareholder value.
According to the law firm that reached an eventual settlement with the company for $6.2 billion, the company used an “accounting gimmick” against Generally Accepted Accounting Principles to masquerade as profitable by hiding expenses and inflating its reported cash flows. Three years after going bankrupt, the company eventually settled with shareholders for $6.2 billion.
Securities Fraud Class Action
The New York State Comptroller, acting as trustee for the state pension fund, led the securities fraud class action. WorldCom shareholders who bought shares between April 1999 and June 2002 joined the settlement. The lead law firm earned about $205 million.
Like Enron, the lawsuit targeted those who enabled WorldCom’s fraud, including CitiGroup.
After the scandal became public, WorldCom faced multiple securities fraud lawsuits across the U.S. These suits named company directors, auditors, and investment banks involved in the fraud.
The cases were consolidated, with the New York State Common Retirement Fund leading the charge. The fund had to navigate restrictions under the Private Securities Litigation Reform Act of 1995, which limited evidence discovery to prevent weak fraud claims.
Lying to Federal Securities Regulators
Before the PSLRA, plaintiffs could sue with minimal evidence, forcing companies to disclose damaging information through broad discovery requests.
In WorldCom’s case, a New York judge partially lifted the PSLRA’s discovery stay, ordering the company to release nearly a million pages of documents already provided to Congress and the SEC.
WorldCom’s former CEO, Bernard Ebbers, faced state and federal charges for orchestrating the fraud. Born in Edmonton, Alberta, he built WorldCom into a $185 billion telecom giant through aggressive acquisitions, making it one of the largest long-distance providers in the U.S.
Ebbers was convicted of conspiracy, securities fraud, and lying to regulators. In July 2005, he received a 25-year prison sentence but was released in December 2019 due to health issues. He passed away on February 2, 2020, at 78.
Working with a Securities Attorney
Securities attorneys help prevent excessive trading and oversee investment decisions. Their work includes:
- Drafting contracts for brokerage firms
- Handling FINRA investigations
- Assisting investment bankers in creating new financial instruments
- Educating mutual funds on the Securities Act of 1933
- Ensuring compliance with securities laws
They also protect companies from breaching fiduciary duties, managing conflicts of interest, and violating federal securities laws.
