Securities and Financial Fraud Law Litigation

Defrauded investors rely primarily on securities laws for recover. Both the federal and state governments have adopted securities laws. The federal law started with the Securities Act of 1933 (“Securities Act”), passed unanimously without debate after the stock market crash of 1929 led to the Great Depression. The next year the Exchange Act of 1934 was enacted to regulate stock trading. The Securities Act primarily addressed the law regarding issuing stock. It approach was not to limit access to the market by evaluating the merits of the offering, rather it would let the investor decide after full disclosure.securities fraud

The states began enacting securities laws early in the 20th century. They were called “Blue Sky Laws” because the politicians claimed that stock promoters selling stock that was little more than blue sky. The political impetus of state laws was to prevent the selling of worthless securities. It therefore is generally a “merit” approach. Under state law it is not always enough to give full disclosure, the issuer must also comply with “fairness” rules. In most cases, an offering must comply with both federal and state securities laws.

In order to protect investors, the normal “caveat emptor” (buyer beware) was reversed to “seller beware.” The seller of a security (or fraudulent purchaser) has the duty to disclose all material facts. Usually investor legal actions are by investors who thought they were buying a low risk security only to find out that it was in reality very risky.

State securities laws often provide the greatest protection to investors but require that the security be returned and limit damages to the amount of the net investment plus an interest rate and possible attorney fees.

Understanding the process of recovering fraud losses

More about civil litigation

Representing the Defendant

Tollefsen Law has over 30 years experience with securities litigation. Although the firm focuses on representing defrauded investors, TL also accepts selected securities fraud defense cases. We take cases where the defendant(s) who did not set out to defraud investors. Often plaintiffs overreach in their eagerness to find “deep pockets”. Sometimes the fraud was caused by a rogue officer and the board of directors is attempting to clean up the mess and save the corporation. We can help in these cases. In one case we registered a securities offering for a company while we defended the company in SEC enforcement action.

Representing the Investor

Generally investors are given powerful rights to recover from the perpetrators of investment fraud. Potential defendants include sellers, officers and directors, other participants, and those who materially aid the fraud. Oregon has a significantly higher standard of protection from those who “materially aid” than Washington reaching even to lawyers doing ordinary legal work. Stock brokers and their firms are also liable in certain circumstances. These investment professionals are required to recommend only investments suitable for the investor’s objectives. They are also fiduciaries who must put the client first, particularly before their desire to obtain commissions.

Contact us about representation

Should you wait to see if the regulators recover your money?
Generally, you cannot expect securities regulators to recover your money. Although the SEC has the authority to get your money back, as a practical matter, it does so only when the defendant is able to pay back the money, which is extremely rare. Washington State regulators do not attempt to recover your money and Oregon does so only on rare occasions.

The securities laws make certain participants and potential supervisors liable if there is securities fraud. Usually recovery is from these individuals if they have “deep pockets” (the ability to pay. You will have to sue these people to recover your money.

Should you sue? Is it worth the time and trouble?

There are a number of things you need to know before you file a legal action. There are several pages of this website devoted to help you understand what is involved in litigation.

Learning about Civil Litigation
Overview of Federal Securities Law
Defining fraud
Liability of stock brokers and their supervisors
Liability of clearing broker dealers

Regulatory Compliance: It’s the Little Things…

Regulatory penalties can be devastating for a company, yet many companies, especially small companies, fail to plan for or devote resources to regulatory compliance. These companies can be confused and incredulous when they become the focus of investigations or sanctions and may delay responding until their very existence is at stake. Proper counsel can help companies understand regulators’ focus which helps them to prepare for and address compliance issues in a timely manner.

General Solicitation One Week On

As readers of this and other startup-focused blogs will be aware, exactly one week ago today general solicitation of securities offerings to accredited investors became legal for the first time in 80 years. Prior to the 23rd of September, coverage of this upcoming shift was divided with some predicting major alterations to the landscape, others predicting hardly any change at all, and yet others delaying judgment, at least until some additional proposed rules are finalized. Reading the Tea Leaves What can we learn from the first week’s tea leaves regarding the initial reaction to general solicitation? Some notable actors were off to the races, with folks like AngelList and WeFunder immediately jumping in and offering solutions that take advantage of the broad exposure offered by general solicitation (while recognizing the need to still comply with accredited investor requirements). Leading the charge were Second Market and WeFunder. The latter has taken perhaps the most proactive stance on general solicitation, even offering to do some securities work on behalf of companies (using generic forms). These companies seem to be betting that the current window between the enactment of the rules adopted in July allowing for general solicitation and the pending adoption of any of the proposed rules will give them a significant head start on their competitors. They are also betting that any new rules won’t change things significantly (the best case for them), or at least won’t be applied retroactively. On the opposite end, FundersClub has taken a cautious “wait-and-see” approach. CEO Alex Mittal has made it clear that the VCs, angel investors, law firms and others that he has...

General Solicitation Now Allowed. What’s Required?

As has been continuously reported in the media, and on fine law blogs, today marks the end of the 80 year ban on general solicitation (public advertisement) for securities sales. This means that for the first time since the Securities Act of 1933 was enacted, companies will be able to go out and solicit groups of accredited investors to invest in their startups, provided that they: Check a box on their form D indicating that they have generally solicited; Take additional steps to verify that their investors are in fact accredited (one page questionnaire no longer good enough); and Ensure that they do not accept any funds from non-accredited investors. #1 is self explanatory. #2 requires a bit of attention, because in the past is was sufficient to have an investor fill out a basic questionnaire verifying that they comply with the definition of “accredited”, as defined in Rule 501 of Regulation D. Now, however, those generally soliciting investments must take “reasonable steps” to ensure that the investors are indeed accredited, and must keep proof of having done so. This means that you will need to ask for personal financial documentation, such as copies of form W-2 or 1040, bank statements from past three months,  and brokerage statements from your potential seed or Angel investors. Many will scoff at this intrusive requirement. #3 is also important. While a “regular” Rule 506 offering still allows for up to 35 non-accredited investors, if you check the box indicating that you’ve generally solicited, you may not sell ANY shares to non-accredited investors. In addition, the SEC took the confusing step of issuing...

“Fraud victims plot legal strategies for recovery” – The Puget Sound Business Journal

Richard Finger Fraud – Victims plot strategy Fraud victims plot legal strategies for recovery Puget Sound Business Journal by Kelly Gilblom, Staff Writer Date: Friday, December 16, 2011, 3:00am PST In the wake of a $7 million financial fraud discovered in Kirkland this September, victims of securities broker Richard Finger have hired attorneys and are turning to arbitration and insurance to recover some of their lost investments. These defrauded investors include not just mom-and-pop outfits but a wealthy Kirkland family with numerous businesses — a family that has hired a prominent attorney. Their strategy to recover lost funds could lay out a possible path for other victims of financial crimes as they struggle to overcome major obstacles to recouping their losses. The majority of the $7 million in assets lost belonged to Finger’s mother-in-law and father-in-law, Brenda and Elling Halvorson, according to lawyers and information in Finger’s charging documents. Their investment with Finger represented only a fraction of their net worth. The Halvorsons own a number of businesses, according to information from the Washington Secretary of State. One of the most well-known of their entities is Papillon Helicopters, a company that offers helicopter, airplane and bus tours of the Grand Canyon and Las Vegas. Papillon, established in 1965, has more than 600 employees and a fleet of 48 helicopters and six airplanes, according to information on its website. The Finger story is familiar: At least 10 victims — family and friends — lost sums of money ranging from less than $100,000 to more than $1 million, according to a criminal indictment against Finger. He lost client money through risky...

“Regulators may have missed securities fraud by Kirkland firm” – The Puget Sound Business Journal

Smith v. Finger Stockbroker pleads guilty to taking millions from investors. FINRA arbitration filed. Regulators may have missed securities fraud by Kirkland firm Puget Sound Business Journal by Kelly Gilblom, Staff Writer Date: Friday, October 21, 2011, 3:00am PDT – Last Modified: Thursday, October 20, 2011, 6:51pm PDT On Aug. 18,Jon-Michael Smith called the Kirkland Police Department to report an unusual theft. Smith, a distraught investor, had been trying to reach his broker for several days because his July statement hadn’t arrived. Finally, Smith phoned a company that handles trading for his account. What he heard made him sick. Instead of the $1.56 million he was supposed to have, the clearing broker said Smith’s balance was just $27,000. The account statements Smith had received were false, part of a fraud allegedly conducted by Kirkland broker Richard Finger Jr. to conceal the fact that he had lost nearly $7 million that his 25 clients had trusted him to manage, according to police reports and court documents. By the end of that week, Smith had given statements to the FBI, the Justice Department and the Securities and Exchange Commission. On Sept. 8, the federal entities went to court to arrest Finger and freeze the assets of his firms, Black Diamond Securities and Black Diamond Capital. What makes the story unusual is that just three weeks before Smith called the police, regulators had audited Black Diamond Securities and did not report finding any fraud. Finger, 32, quickly admitted his misdeeds. In a statement issued two weeks after Smith went to the police, he “acknowledged deceiving some of his customers” and said he...

Criminal Profiteering

Criminal Profiteering: Washington State’s “Baby” RICO Act The Criminal Profiteering Act of 1985 is Washington State’s version of the federal RICO law.1State v. Thomas, 103 Wash. App. 800, 14 P.3d 854 (2000); Bowcutt v. Delta North Star Corp., 95 Wash. App. 311, 976 P.2d 643 (1999) (trial court erred in failing to provide full scope of equitable remedies authorized by Washington statute). It provides civil penalties and remedies for a variety of criminal activities. “Criminal profiteering” is defined to include the commission, or attempted commission, for financial gain, of any one of a number of crimes listed in the statute.2These include many violent felonies, as well as felonies relating to gambling, drugs, pornography, prostitution, extortion, and securities fraud. The act provides that a “pattern of criminal profiteering activity” means engaging in at least three acts of criminal profiteering within a five-year period. To constitute a “pattern,” the three acts must have the same or similar intent, results, accomplices, principals, victims or methods of commission, or be otherwise interrelated by distinguishing characteristics including a nexus to the same enterprise, and must not be isolated events. A “pattern” of profiteering is usually required before any of the special civil remedies apply.3Winchester v. Stein, 135 Wash. 2d 835, 852, 959 P.2d 1077, 1083 (1998). See 16A WAPRAC § 26.51. There are many similarities between the Washington statute and the federal statute, and as a result, Washington courts look to the case law interpreting the federal statute as a guide to interpretation of the Washington statute.4Id. However, the Washington statute has been characterized as being somewhat narrower. For example, whereas the federal statute...

Washington State Securities Law Exemptions

Exemptions Used by Small Business Issuers Businesses that raise money are called “issuers” because they issue securities to their investors. Regardless of the entity form (e.g. partnership or corporation), all capital raising is by “issuers.” Like federal law, Washington State requires that the securities being “issued” be either “registered” or “exempt.” Since registration is expensive and time-consuming, issuers first look to see if there is an applicable statutory exemption from registration. What follows is a general description of exemptions which are potentially available to issuers in Washington State. Experienced legal advice is necessary to determine if one of these exemptions fits your facts and circumstances. Isolated Transactions – Issuer Exemption for up to 3 sales of an outstanding security during the prior 24 months by or on behalf of the issuer. There is no filing requirement. The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers.  Registration as a salesperson or broker-dealer is not required if no commission is paid. Washington informally allows finders fees if the investor is accredited.  RCW 21.20.320(1);  WAC 460-44A-050(1)(d); Interpretive Statement 9 Non-public Offering Exemption – Permits sales not involving a public offering consistent with Section 4(2) of the federal Securities Act of 1933. There is no filing requirement. The offering must qualify for exemption from federal registration pursuant to Section 4(2) of the federal Securities Act of 1933 and Securities and Exchange Commission Securities Act Release No. 4552 The issuer is not required to register as a broker-dealer. Commissions may be paid to salespersons or broker-dealers.  Registration as a salesperson or broker-dealer is not required...

Accredited Investor Defined

Accredited Investor Defined by Regulation D The federal securities laws define the term accredited investor in Rule 501 of Regulation D as: Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; ; Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; Any organization...

Liability of Stock Brokers

Liability of Stock Brokers and their Supervisors Stock brokers are usually held liable for investor losses under five legal theories: Misrepresentation in connection with the purchase or sale of a security; Selling an unregistered security; Churning the investor’s account; Advising the investor to buy stocks that are not suitable for the investor; and Breaching the fiduciary duty owed to the investor. Since stock brokers often do not have the resources to reimburse the investor, it is usually important to find the broker’s employer or supervisor also liable to the investor.  This is called “secondary liability” and is predicated primarily on the failure of the broker-dealer to supervise the stock broker. Misrepresentation Liability for misrepresentation is premised under rule Securities Exchange Act of 1934 10-b (5) and the federal court cases implying a private remedy.  This theory of liability is usually not applicable to brokers unless they sell a security without the approval of the broker-dealer with which they are licensed (selling away).  This usually happens with an investment which its promoters claim is “not a security.”  Under federal law, most passive investments whether described as a loan, equity investment, business investment, business opportunity, or some contract which costs money and offers a profit, are “securities.” Oregon and Washington have state securities laws that often make misrepresentation easier to prove than the federal statute. Unregistered Security Generally, all securities must be registered by filing full disclosure documents with the Securities and Exchange Commission (SEC).  There are narrow exceptions allowing sales where there is little reason to require the issuer to undergo the expense of registration.  These generally deal with small...