Defending SEC Complaints – Section 10(b) and 17(a) Litigation
Experienced Federal Securities Laws Defense Team
If you have been charged or are being investigated for fraud in either the offer of securities or purchase or sale of securities, then you need to take immediate action in your defense.
Fraud charges are serious concerns for individuals and entities, especially as the SEC seeks to impose more stringent fines on those who have allegedly defrauded investors or capital markets.
The prominent Enron and WorldCom scandals have yet to be forgotten. The SEC has not neglected to take full advantage of its increased enforcement authority under the Sarbanes-Oxley Act of 2002 (“SOX”).
Do not wait for a federal subpoena and internal investigation to turn into a full-blown litigation. Significant fines, penalties, injunctions, and disgorgement orders are likely—putting everything you have worked for at stake. Protect your reputation now.
At Oberheiden, P.C., we have an experienced, highly knowledgeable, and dedicated team of securities fraud defense attorneys. We can prepare an individualized and personalized defense strategy for your case.
Get a qualified attorney committed to an aggressive defense and the highest standards of excellence, accountability, and proven results. Get us on your side.
Call the defense attorneys at Oberheiden, P.C. right away.
The SEC and the Anti-Fraud Provisions of the Federal Securities Laws
The Securities and Exchange Commission (“SEC”) is responsible for ensuring the protection of investors and capital markets in the United States. It accomplishes this task by enforcing two securities acts:
- The Securities Act of 1933: The 1933 Act requires that all securities that are or will be offered for sale be registered with the SEC or meet an applicable exemption. The seller—or offeror—of the securities must provide a prospectus and registration statement.
- The Exchange Act of 1934: The 1934 Act regulates the purchases and sales of securities after initial issuance—the secondary market. It involves reporting requirements, proxy materials, broker-dealers, insider trading, tender offers, etc.
Any individual or entity that engages in fraudulent behavior exposes themselves to liability under the federal securities laws.
A federal investigation by the SEC typically begins by the receipt of a tip from a whistleblower (usually a disgruntled employee or prior investor). Investigations may also be initiated by the SEC itself based on a review of public filings or other reports.
The SEC has broad yet powerful enforcement tools. It can compel the production of documents, testimony, seek disgorgement orders in the federal district courts, impose injunctions, impose civil penalties, mandate public disclosures, etc.
One of the most investigated and litigated provisions in the Securities and Exchange Acts involve the anti-fraud provisions, discussed in more detail in the next section.
Sections 10(b) and 17(a): Similarities and Differences
Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act both involve anti-fraud provisions. Section 10(b) and Rule 10b-5 thereunder prohibit fraud in connection with the purchases and sales of securities. Section 17(a) prohibits fraud in the offer or sale of securities.
Overall, fraud—including material misrepresentations and material omissions—are prohibited in the offer, purchase, and sale of securities.
At the same time, these provisions differ in several respects. Liability under Sections 17(a)(2) and 17(a)(3) may be based on negligent conduct, while proof of “scienter” is needed for Section 17(a)(1) and Section 10(b). Also, Rule 10b-5 claims allow for private rights of action in contrast to Section 17 claims.
Section 10(b) and Rule 10b-5 under the Exchange Act
Section 10(b) and Rule 10b-5 thereunder are the anti-fraud provisions of the Exchange Act. They prohibit manipulative and deceptive devices in transactions on the secondary market—meaning the purchases and sales of securities after their first issuance.
These provisions make it unlawful for any person, in connection with the purchase or sale of any security, to use any means of instrumentality in interstate commerce, directly or indirectly, to
- employ any device, scheme, or artifice to defraud
- 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
- engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
To start out, the definition of “security” needs to be understood. A “security” is a broad term and can include stocks, bonds, debentures, and any other instrument that is typically characterized as a security.
Although the SEC has broader enforcement power and leeway compared to private parties in private litigation, an investigation for fraud under Section 10(b) and Rule 10b-5 thereunder generally requires a showing of the following elements:
- Material misstatement or material omission: The misstatement must misconstrue or mischaracterize an important aspect of the transaction. The omission will only lead to liability if its inclusion was necessary to avoid the statement from being misleading. Both must be material, meaning that there is a substantial likelihood that a reasonable individual would attach importance to it in making an investment decision.
- The material misstatement or omission was made with scienter: This means that the statement was made with the intent to deceive or manipulate the investor(s).
- There was some reliance on the material misstatement or omission: If no one relied on the misstatement or omission, there is no harm and there is no one for the SEC to protect. Investors who buy and sell on the market at market price are presumed to be trading in reliance that all material information is correct and fully disclosed.
- There is economic loss suffered by investors that is causally connected to the material misstatement or omission: The material misstatement or omission must have caused a negative reaction in the stock’s price, which caused the investors to lose money.
While these above factors are typical in an SEC investigation for fraud, it is important to understand that the SEC’s enforcement authority is far-reaching.
Any sign or indication that you and your business are under investigation for securities fraud under the Exchange Act should immediately alert you to hire a defense attorney right away.
Section 17(a) under the Securities Act
Section 17 is the anti-fraud provision of the Securities Act. It broadly regulates all offerings and sales of the issuer as well as prohibits conduct that would tend to defraud purchasers of those securities.
Section 17(a) makes it unlawful for any person in the offer of slae of any securities by use of any means of instrumentality in interstate commerce, directly or indirectly, to
- employ any device, scheme, or artifice to defraud, or
- obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
- engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
Courts generally require that scienter be proven for Section 17(a)(1) claims while mere negligence would be sufficient for claims under Sections 17(a)(2) and 17(a)(3).
This increases your liability exposure because conduct that was not intentional could subject you to severe fines and penalties under certain Section 17(a) provisions.
Therefore, it is important to know how to respond to an investigation or subpoena dealing with Section 17(a). The best strategy to undertake immediately is to retain an attorney experienced in SEC fraud defense.
The Defense Approach at Oberheiden, P.C.—Message from Founder and Managing Partner
In simple terms, SEC litigation alleging Section10(b) or Section 17(a) violations typically claim that you, with the necessary willfulness, manipulated and defrauded investors into a scheme that involves the fraudulent offer, sale, or purchase of securities.
The Approach of Other Lawyers
Now, there are two ways to defend against such allegations. From the many clients that have switched to us in federal cases, I understand that the vast majority of lawyers recommend to their clients to deny scienter.
That’s not our approach. And here is why: once your lawyer represents that you lacked the scienter, he essentially admits that you did engage in misconduct, that you did violate SEC rules and regulations—however, just not intentionally.
In my opinion, that approach is both dangerous and often unnecessary. It is dangerous because it leads to an admission, and it forces you to utilize your very last line of defense: lack of mens rea.
Under my approach, I spend countless hours with my clients, hear and analyze the full chronology, and ultimately work on a factual defense to say: my client did not engage in misconduct in the first place; the factual allegations are not correct and here is why not.
I do so with a team of former FBI/SEC and former Secret Service agents—professionals with unimpeachable credibility. They interview witnesses, help with discovery and forensics, and thus add an important piece to the defense.
We work together to provide you a personalized defense strategy designed to fight for you.
Why Clients Choose Our Team of Securities Fraud Defense Attorneys
In short, clients choose us for their legal representation for four main reasons:
- Extensive experience in securities defense
- Skilled legal representation and defense strategies
- Knowledge of emerging securities law policies, laws, and regulations
- Strong interdisciplinary background and perspective
Dr. Nick Oberheiden
Founder and Managing Partner at Oberheiden, P.C.
Need Help with Federal Securities Laws Defense?
If you find yourself in the middle of a federal investigation for securities fraud, do not wait any longer to secure the advice of a securities fraud defense attorney.
The sooner you hire an attorney, the sooner that attorney can start preparing your defense strategy, negotiating with the SEC on your behalf, and securing the most favorable result for your situation.
The attorneys at Oberheiden, P.C. have a proven success record at defending clients against SEC-initiated investigations for violations of the anti-fraud provisions. Your success is our mission and top priority.
Our team of SEC defense attorneys are prepared to handle complex cases of securities fraud and eagerly await the opportunity to assist more clients in regaining their freedom and liberty.
Call us today or contact our office for a free consultation to get the advice you need.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.