No businessperson sets out to commit securities fraud, yet people find themselves on the receiving end of a phone call or letter from an investigator when they choose not to follow, or are unaware of, the laws regarding securities. By the time you’ve reached that point, you’re certainly facing financial consequences and sometimes criminal penalties as well.
A security is an interest in a company, often represented as shares of stock in a corporation or membership interests in an LLC, that is sold to another party. Securities fraud refers to a variety of illegal activity regarding this ownership interest from misconduct on the part of a securities broker, mismanagement of assets by a firm, to problematic behavior on the part of the business selling securities.
Startups, Growing Businesses, and Securities
The founders of startup companies often have big dreams without big wallets and forego the advice of lawyers when setting up their firms and selling securities. While there are exceptions to securities rules that allow startups to raise funds, not following these rules closely quickly gets companies in hot water. Whether they are publicly offering ownership in a company that hasn’t properly registered, manipulating the price of their stock, or not providing key information to investors, there are many problems that can arise.
Other businesses find that their business model begins to move toward being a pyramid scheme, Ponzi scheme, or other type of fraud because those are surprisingly profitable models when you’re at the top of the pile. When greed gets in the way of good sense, owners turn a blind eye towards the drawbacks of their models and ride the wave while investors lose.
Other businesses, as their operations continue, commit securities fraud when they conceal important information from shareholders and investors such as industry trends, manipulate their business metrics and accounting to show a different picture than reality, misappropriate corporate funds, engage in bribery or unfair competition, or participate in other types of business fraud.
Private Actions Against Wrongdoers
While the government is a primary party taking action against securities fraud, shareholders also have private rights of action against companies they believe are being mismanaged or are beginning to behave in a problematic fashion. When a business has violated their fiduciary duties to their shareholders, the shareholders can sue. While a board of directors has the right to make bad business decisions, they cannot engage in activity that is fraudulent, illegal, or grossly negligent.
If you’re considering a civil lawsuit against the directors of a business, or facing the possibility of a shareholder suit, experienced business litigation lawyers, like the team from Dunn Law Firm, can help you and your team prepare. Reach out to the Dunn Law Firm by calling (435) 628-5405 and set up a free consultation today.
