The broadest federal anti-securities fraud measure is Rule 10b-5, promulgated under Section 10(b) of the Exchange Act of 1934. Under Rule 10b-5, individuals may be civilly liable if the plaintiff establishes the following elements: (1) that the individual misrepresented a material fact; (2) that the individual did so knowingly, i.e. scienter; (3) that the plaintiff relied on the individual’s material misrepresentation; and (4) that the plaintiff’s reliance on the material misrepresentation caused their loss. If the SEC establishes those elements, then the individual may be criminally liable.
Additionally, issuers who misrepresent materials facts in a registration statement can be civilly liable under Section 11. Unlike Rule 10b-5 liability, which requires knowledge of the misrepresentation, Section 11 imposes strict liability on issuers. That is, regardless of whether issuers know of material misrepresentations, they could still be liable for securities fraud if their registration statement contains a material misrepresentation.
Rule 10b-5 also creates liability for insider trading. Traditionally, individuals could only be liable under Rule 10b-5 under the classical theory of insider trading, which is when an individual trades shares without disclosing material information; see Chiarella v. U.S., 445 US 222 (1980). In U.S. v. O’Hagan, 521 U.S. 642 (1997), however, the U.S. Supreme Court allowed the misappropriation theory of insider trading to predicate 10b-5 liability, which opened the application of 10b-5 to broader forms of insider trading.
State Securities Fraud
State governments may also impose civil and criminal liability on individuals engaged in securities fraud. For example, Title 4 of the California Corporations Code provides that securities fraud in California may result in a fine, imprisonment, or both.
[Last updated in January of 2022 by the Wex Definitions Team]