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Background
The actions to recover losses experienced by investors are
generally based upon the federal securities laws, the state
securities laws, certain National Association of Securities
Dealers (NASD), New York Stock Exchange (NYSE) and other Self
Regulatory Organizations’ (SRO) rules that demonstrate
the standards of the securities industry and state laws concerning
breach of contract and common law fraud. Because of the Arbitration
Clauses placed in most account agreements, virtually all actions
are brought before the NYSE and/or NASD Dispute Resolution
Arbitration Panels.
The basic fraud law and regulation is found under Rule 240.10b-5
promulgated under Section 10(b) of the Securities Exchange
Act of 1934. This rule has been codified in the securities
laws of the various states and is followed by the NYSE and
NASD.
Rule 10b-5 states that it shall be unlawful for any person,
directly or indirectly, by the use of any means or instrumentality
of interstate commerce, or of the mails, or of any facility
of any national securities exchange:
- to employ any device, scheme or artifice to defraud;
- to
make any untrue statement of a material fact or to omit
to state a material fact necessary in order to make
the statements made, in the light of the circumstances under
which they were made, not misleading; or
- to engage
in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security.
A multitude of case rulings have been issued and rules and
regulations promulgated to define what this law means. Again
this memorandum does not discuss each and every case ruling,
law or regulation that might be the basis of an action by one
who suffered a loss in the stock market. The purpose is to
discuss and explain common broker/dealer and salesperson actions
that may have caused losses in connection with your investments
so that you may decide whether or not to seek the advice of
counsel experienced in federal and state securities laws, the
Rules of the NASD, NYSE and other SROs and securities arbitration
procedures.
The most fundamental rule governing the conduct of broker/dealers
and their salespersons is described in case law as the “Shingle
Theory”. It states that when a broker-dealer hangs out
his shingle he implicitly represents that he will deal fairly
with the public. The duty to treat the customer fairly and
to put the customers’ interests and transactions before
those of the broker-dealer and the representatives is a fundamental
requirement found in most securities laws and regulations.
Any obvious violation of that duty is a basis for additional
inquiry.
This memorandum has been categorized
by types of conduct that violate these laws, rules and
regulations.
Next topic: Fraud
by Conduct
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