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Corporate & Securities Law

: Wall Street Law Blog

SEC Shocker? Purpose of securities laws is to prevent fraud.

By Brett D. Sherman

Current and former Wall Street execs continue to trot out lots of euphemisms and jargon-filled explanations (we really like "unprecedented dislocation") for their actions (and inaction) during the great credit bubble of the last decade. The idea is to swirl enough smoke to cover enough secrets and lies to escape real responsibility (like prison and paying $$$$$ to their victims) for unlawful conduct that caused the global financial / credit crisis.

Wall Street Law Blog has been on a quest for clarity. So we paid a visit to the SEC website to see if we could at least explain the motives of Congress for enacting the main Federal securities laws way back in the 1930's. We wanted to understand why the 1933 and 1934 Acts were passed.

We wondered - Could there possibly be a simple explanation in words commonly used and understood by speakers of the English language? If so, could such an explanation be used to blow the smoke away? Is there a way to use the securities laws themselves to judge Wall Street's conduct by a standard all of us can understand?

Lo and behold... the answer is yes. As it happens, public companies cannot make material misrepresentations (they can't lie about important stuff). The idea is that companies commit securities fraud when they deprive investors of the kind of information needed to make informed investment decisions.

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THE SEC ACTUALLY CALLS THE CONCEPT SIMPLE AND STRAIGHTFORWARD! SO, WITHOUT FURTHER DELAY, HERE IS THE SEC DESCRIPTION:

"The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. "

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"To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions."

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To meet the SEC's requirements for disclosure, publicly traded companies "must tell the public the truth about their businesses... and the risks involved in investing."
http://www.sec.gov/about/whatwedo.shtml
Brett Sherman; The Sherman Law Firm