For the average investor these days, understanding the ups and downs of the stock market is no easy task as rules and regulations constantly evolve, while global economic turmoil muddies the already turbid waters of public company finance.
But securities laws and securities regulations lay the foundation for efficient and functional capital markets around the world. In an ideal world, securities regulations are strict enough to minimize frauds and scams, but loose enough to avoid stifling innovation by needlessly restricting the movement of capital investments across borders and jurisdictional boundaries.
Each and every day, billions of dollars change hands with stocks and bonds bought and sold, alongside initial public offerings that raise millions for firms that find themselves beholden to shareholders. Whether they’re institutional investors like large public pension funds or individuals trying to shore up their retirement assets, shareholders have to trust the companies they invest in, to tell the truth about their true financial state, especially in the initial public offering stage.
Working with a securities attorney
At the heart of these transactions, of course, lies an army of securities lawyers who draft the vast amounts of paperwork involved in public company finance and operations. But what does a securities lawyer do? What role do they play in the operation of capital markets big and small, from the New York Stock Exchange to the wild-west-like world of the over-the-counter penny stock pink sheets?
Securities law in Canada, the United States, and Europe encompass many different practice areas for lawyers and litigators, from facilitating major deals to investigating shady shenanigans of companies that raise millions by fooling the investing public. They oversee major mergers and acquisitions, conduct due diligence on share issuances and offerings, and on the litigation side, they either sue or defend companies from securities class actions or shareholder derivative suits where a firm is accused by shareholders or regulators of misrepresentation or outright securities fraud.
Securities and Exchange Commission
In addition, they deal with arbitration matters between broker-dealers and their clients that fall under the Financial Industry Regulatory Authority, the industry-led regulator in the United States. As well, securities lawyers deal with matters that fall under the purview of state, federal, and provincial government regulators including the U.S. Securities and Exchange Commission, which administers and enforces arguably the most robust, consequential, and overreaching legislation over the most important capital markets and stock exchanges in the world.
Many students after law school want to work in the securities issuers space. There’s a lot of money to be made. The lawyers can eventually work on IPOs, and might even trade their own securities on the side of the securities exchange.
Different securities lawyers for different situations
Securities litigation can involve any number of issues when it comes to how a publicly traded company operates and discloses information to the investing public. Misrepresenting a company’s true financial state in public disclosure documents or prospectuses in preparation for an initial public offering can lead to lengthy court battles between firms and shareholders. Securities class action lawsuits involve individual and corporate investors and institutional investors such as public pension plans, who can take a company to court should they be caught out in a lie.
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On the smaller scale between stock brokers and clients, though, arbitration and administrative law matters get handled through binding arbitration hearings that are pseudo-judicial in nature, meaning that private arbitrators can issue decisions much like judges in public courtrooms do. Complaints against broker-dealers by their clients are, of course, not uncommon and it’s up to securities lawyers to either prove the complaint to be valid or to be without merit during an arbitration hearing.
But individual investors and small broker-dealers aside, the big money involved in public company finance and the securities class actions and regulatory enforcement actions that often result if something goes sideways are perhaps the most visible and well-publicized activities related to securities laws.
Avoid insider trading
But securities lawyers play different roles depending on whose side they’re on, and a securities lawyer’s work doesn’t always involve disputes or conflict, but rather voluminous contracts and documentation involved in private placements, stock offerings, and mergers and acquisition deals. A lawyer for the Securities and Exchange Commission investigating insider trading at a big Fortune 500 company has to dig through mountains of documents before deciding to initiate an enforcement action, while that company’s lawyer has to work to stave off regulatory scrutiny and avoid any type of enforcement action, which can have costly consequences when pursued vigorously and effectively.
The high-stakes world of securities litigation is one thing, but there’s a lot more to the practice of securities law when it comes to initial public offerings, or big merger deals and acquisitions. For those types of deals, transactional securities lawyers work for corporate clients to comply with securities laws, whether it’s a private firm setting out to go public on a stock exchange, or a big company with its eyes on snapping up a smaller competitor.
Transactional securities lawyers draft documents for stock offerings and prepare all manner of the documentation involving soon-to-be public companies, ideally ensuring that the disclosure materials associated with the deal are accurate and in compliance with federal and state securities laws, as well as stock exchange rules.
Securities regulation and the stock exchange
A corporation’s securities lawyer is obviously out to protect the interests of the client company, but individual investors might also find themselves in need of 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.
If things go wrong and investors end up losing money despite assurances by company management or by shady stock brokers, securities lawyers can spring into action and find out if there was fraud or negligence or mismanagement involved, rather than just bad investment luck. If, for example, you find your investment portfolio dropping in value significantly, that loss could either be the result of market forces over which a company or broker has no control. But they could also be the result of negligence, mismanagement, fraud, or other misconduct that can entitle investors to damages in court actions or in 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 true 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 biggest corporate securities fraud cases involving billions in losses to shareholders and major 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 biggest securities fraud settlement in history, and the firm leading the case, for its part, got $688 million out of the settlement.
Securities litigation and bankruptcy
But 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 accountable the banks behind the firm 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 major 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.
Fraud and insider trading
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 gone on to launch another company with people he used to work with at the controversial consulting firm McKinsey & Co. The company’s former chief financial officer who cooperated with federal authorities in their investigation of Enron, Andrew Fastow, 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 a three-year period, executives at the company had been cooking the company’s books by painting a rosy financial picture of profitability and long-term health.
But the truth was, the sun was setting on WorldCom and other once-mighty telecommunications companies as the world was set to go wireless at the dawn of the 21st century. Like in the Enron scandal, it was a whistleblowing employee who laid the foundation for what would become one of the biggest corporate accounting scandals ever.
The employee, who had become concerned with how the company was recording certain expenses, saw how they had the effect of overstating the company’s assets and revenues. When the firm’s internal auditors found out about the whistleblower’s concerns, they uncovered billions in dubious entries on the company’s balance sheet. After the company’s audit committee chair told the Securities and Exchange Commission about the findings, the commission’s own investigation uncovered the scope of WorldCom’s massive fraud, where it had overstated the value of its assets over a number of years by a whopping $11 billion.
The company went bankrupt in July 2002, leaving shareholders out billions when the fraud revelations came to light. According to the law firm that reached an eventual settlement with the company for $6.2 billion, the company had used an “accounting gimmick” that went 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 lead plaintiff in the securities fraud class action was the New York State Comptroller, as trustee for the state’s pension plan. WorldCom shareholders who bought the company’s shares between April 1999 and June 2002 were part of the class of investors included in the settlement, and the law firm that led the case against WorldCom got about $205 million when all was said and done. Also similar to the case of Enron, the class action against WorldCom Inc. included defendants that enabled the company’s misdeeds, including the investment banking giant CitiGroup.
Once the accounting scandal at WorldCom became big news around the world, it faced a host of securities fraud class actions filed all over the United States, naming company directors, outside auditors, and investment banks that signed off on WorldCom’s misdeeds. Eventually, the cases were consolidated and the New York State Common Retirement Fund was tapped as the lead plaintiff. One of the obstacles the fund had to overcome was the Private Securities Litigation Reform Act of 1995, which was purportedly passed to discourage frivolous securities fraud cases with new rules about evidence discovery.
Lying to federal securities regulators
Before the PSLRA was passed, plaintiffs reportedly could file suit on somewhat thin evidence, only to compel companies to hand over potentially damaging evidence on broad discovery requests. In the case of WorldCom, the judge in New York partially lifted the discovery limitation stay under the PSLRA and compelled the company to hand over nearly a million pages of documents it had already given the government agencies involved in investigating the scandal, including Congress and the Securities and Exchange Commission.
WorldCom’s former chief executive officer Bernard Ebbers faced both state and federal charges for his part in the company’s massive fraud. Born in Edmonton, Alberta, Ebbers is said to have built WorldCom into a telecommunications behemoth with a $185 billion market cap at its peak by spearheading a series of acquisition deals that eventually saw WorldCom expand to one of the biggest providers of long-distance services in the United States.
Ebbers was charged with multiple felonies including conspiracy, securities fraud, and lying to federal securities regulators. He was sentenced to 25 years in prison in July 2005, but was released in December 2019 on compassionate grounds because of health problems. Ebbers passed away on Feb. 2, 2020 at the age of 78.
Working with a securities attorney
Attorneys in the corporate finance space will make sure that there is no excessive trading and will likely get involved in investment decisions.
Below are some common things that a security lawyer might do:
- Work with brokerage firms on contracts
- Work on FINRA investigations
- Create a new financial instrument (with the investment bankers)
- Educate mutual funds about the Securities Act of 1933
- Work with issues to ensure compliance
Lawyers will also make sure that the companies they work for don’t enter a breach of fiduciary duty. They will also ensure there is no conflict of interest. And of course, they will make sure that all Federal Securities laws are followed.
Securities lawyer conclusion
Securities lawyers play a unique role when it comes to the functioning of the world’s public capital markets. It’s through their knowledge and analysis of laws and regulations that companies navigate the process of going public or raising capital through private placements. But when a company is accused of wrongdoing, as the cases of Enron and WorldCom show, securities lawyers and law firms are often if not always instrumental in ensuring shareholders burned by major scandals get paid back at least some of their losses.
Given the complexity and volume of laws and rules and regulations governing how companies do business after going public, securities lawyers play a crucial part in how companies conduct themselves. Whether they’re offering legal opinions and analysis of how to maintain compliance with securities regulations or tackling the mountainous task of filing a shareholder class action, securities lawyers will likely never be out of a job. Corporate greed knowing virtually no bounds, a good securities lawyer can be the saviour for shareholders victimized in schemes that sometimes run into the billions of dollars.
If you are ever confused about the types of securities or the securities industry, book a free consultation with a securities lawyer. Pick one that has many years of experience, and has worked with underwriters in the past.