A Review of The Securities and Commodities Investment Laws
Financial Fraud Has Probably Been Around Since The Dawn Of Commerce. It Has Always Been Perpetrated By Individuals Who Scheme To Take Possessions (Goods And Capital) From Another By Misrepresentations, Misleading Statements, Manipulation And Other Means Declared Over Time To Be Fraudulent Practices, Schemes, Contrivances, And Devices. As Long As There Have Been Schemers, There Have Been Laws Enacted After-The-Fact To Deter And Punish Unscrupulous Men And Women. We Can Find Some Of The Earliest Anti-Fraud Laws In The Mitzvot (Commandments Rooted In The Books Of Leviticus And Exodus), Jewish Law Related To The Protection Of Private Property And Administration Of Justice, Such As:
467. Not to steal money stealthily (Leviticus 19:11)
470. Not to covet and scheme to acquire another’s possession (Exodus 20:14)
It has been documented as far back as 300 BC, when a Greek merchant, Hegestratos, schemed to defraud an investor who had been given the rights to the merchant’s profits, ship and cargo in exchange for the investment; Hegestratos’ scheme was to sell the corn, sink his boat and not repay the investor, but he was caught and drowned in the process of perpetrating the fraud.
One of the first financial frauds in our young nation was an insider trading scheme perpetrated by William Duer, Assistant Secretary to the Treasury, which led to the speculative bond bubble of 1792 and Buttonwood Agreement (the foundation for securities trading rules of the New York Stock Exchange). In the 1800s and early 1900s, as more capital was needed from investors to grow commerce in our nation, so did the growth of fraudulent schemes: “watered stock” sales; “cornering the market;” “poop and scoop;” “pump and dump;” “stock pools;” and other market manipulation schemes. Gradually, our states, and eventually our Federal government stepped in to stop fraudulent schemes and regulate markets, exchanges and brokers.The Blue Sky Law
The first securities laws appeared on the books in Massachusetts in the 1850s in response to the speculative trading of railroad stocks. In the early 1900s, Kansas became the first state to enact what are now commonly referred to as “Blue Sky Laws,” a law which one Supreme Court Justice explained as:
[T]he name that is given to the law which indicates the evil at which it is aimed, that is, to use the language of a cited case, “ ‘speculative schemes which have no more basis than so many feet of ‘blue sky’; or as stated by counsel in another case, ‘to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.’ ”
The states led the charge of enacting securities laws, and by 1933 all 47 states except Nevada had Blue Sky laws. But it was difficult to comply with laws of all 50 states. In the 1950s, there was a push to make the various state laws consistent with one another because the securities business had grown and state laws impeded interstate offerings of securities. Today 40 of 50 states have Blue Sky Laws patterned after the Uniform Securities Act of 1956 (the “Uniform Act”). The Uniform Act has been amended and revised several times with its latest iteration known as the Uniform Securities Act of 2002 (amended 2005), but so far only 14 states and 1 U.S. Territory have adopted this model law. Florida has never adopted any version of the Uniform Act; rather, it has patterned itself after the Federal securities laws.The Federal Securities Laws
On the Federal level, there were no securities laws until after the 1929 stock market crash, which devastated thousands of small investors caught up in the stock market euphoria. The 1929 crash which led us into the Great Depression was the impetus for Federal regulation of the securities industry. President Roosevelt and Congress recognized the importance of the capital markets to help us emerge from the Great Depression, and so trust and confidence needed to be restored in the capital markets through Federal government regulation.
Congress first enacted the Securities Act of 1933 (the “33 Act”) with a focus upon registration, disclosure and fraud in the initial offer and sale and distribution of securities. One year later, Congress enacted the Securities Exchange Act of 1934 (the “34 Act”) in an attempt to regulate the securities markets and trading of securities after the initial offer to the public, as well as the registration and conduct of exchanges and brokers who were involved in the trading of those securities in the secondary market. This statute included the anti-fraud provision Section 10 (b) and promulgated the well-known Rule 10b-5, which has been interpreted broadly to prohibit all misrepresentations and misleading statements and all kinds of fraudulent schemes, devices and practices in the offer and sale of securities at any stage. The 34 Act included provisions that led to the creation of the Securities and Exchange Commission (the “SEC”) to regulate the markets, exchanges and brokers through securities industry self-regulatory bodies like the New York Stock Exchange and National Association of Securities Dealers now known as the Financial Industry Regulatory Agency (“FINRA”). In 1939, Congress enacted the Trust Indenture Act of 1939, regulating debt securities issued by state and local governments and their agencies, as well as corporations. The next year, the Investment Company Act of 1940 (regulating mutual funds) and the Investment Advisors Act of 1940 (regulating investment advisors) were enacted.
The five statutes above are the core Federal securities laws in our country. They have been amended over time as markets grew, as financial crises crippled our economy and new fraudulent schemes were uncovered by the regulators. The amendments included many laws with their own popular names like the Securities Investor Protection Act of 1970, requiring the securities industry to fund a trust to protect investors against misappropriation of funds and securities; the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988, in an attempt to stop what Mr. Duer and so many greedy insiders have been doing since 1792; and Dodd Frank Act in 2010 to regulate the many fraudulent practices that led us into the 2008 financial crisis and finally establish a national “Fiduciary Rule,” a standard whereby stockbrokers like investment advisors were required to put the investors interest before their own. After ten years of studies and lobbying by the securities industry, the only rule the SEC could pass is the watered down “Best Interest Rule” which goes into full effect on June 30, 2020.
The core Federal securities laws have also been supplemented with politically charged laws like the Private Securities Litigation Reform Act of 1995 (the “PSLRA”); the Sarbanes–Oxley Act of 2002 (“Sarbanes-Oxley”) to limit the number of class actions and regulate corporate fraudsters and accounting firms who aided corporations like Enron and WorldCom, which contributed the stock market crash in 2000; and the Jumpstart Our Business Startups Act (the “JOBS Act”), which was intended to encourage funding of small businesses after the 2008 financial crisis but only led to more opportunities to defraud investors by lessening the safeguards previously enacted for the protection of investors.The Commodities Laws
The commodities market in our country grew with the need to transform farming from just feeding farmers and their families to feeding cities with growing populations. There was a need for large scale production and marketing of surplus agricultural commodities. In the early 1800s, a network of banks, grain dealers, merchants, millers and commission houses with commission agents became the intermediaries who bought, stored, sold, shipped and delivered the surplus of commodities through a system involving lines of credit, warehouse receipts and exchange of discounted banknotes. But volatility in commodities prices put a limit on the number of bankers willing to lend to commission agents to buy grain they had not yet sold, so that system failed.
By the middle of the 19th century, the growth of commerce, innovations such as grain elevators to store grain and corn and railroads to ship the commodities to market, led to the development of another financing mechanism: forward contracts (not futures contracts). Forwards were contracts between merchants and buyers of the commodities. With buyers, merchants could now get financing from banks and their business grew through the formation of commodities exchanges, such as the Board of Trade of the City of Chicago, now known as the Chicago Board of Trade (the “CBT”), which initially functioned as a meeting place to resolve contract disputes and discuss other commercial matters.
But the forward contract still left the holder of the contract exposed to a great deal of risk at the time of delivery, and so the initial holders began to sell their forward contracts and then others traded their forward contracts among one another as a form of speculation on future prices at the time the commodity was due to be delivered. It was easy to find a speculator early in the life of the forward contract, but at the time of settlement it was difficult to find any traders who wanted to be responsible for taking delivery, storing, selling and shipping the agricultural product to the end user. In the second half of the 19th century, to overcome those impediments, the CBT transformed forward contracts to futures contract with a set of rules and procedures to restrict trade to reliable members; standardize contracts; require traders to deposit margins as security so they would fulfil their obligations; settle contracts in a specific manner; and to settle grievances among members. As the commodities business grew, so did the formation of clearing houses to match and settle their futures contracts with yet another set of rules and procedures.
There were many skeptics and critics of future contract trading: “critics were suspicious of a form of business in which one man sold what he did not own to another who did not want it.” Morton Rothstein (1966). In the late 19th century, Congress made its first attempt to outlaw speculative trading in commodities through options and futures contracts by introducing the Butterworth Anti-Option Bill but it failed to become law. Despite the public’s distrust of the commodities futures market as rank speculation, the regulation of the commodities futures market was left to the CBT and other exchanges and clearinghouses to self-police their commodities business.
It was not until after World War I, when prices for grain fell out of the sky, that the Federal government finally stepped up to regulate the industry. In 1922, Congress enacted the Grains Futures Act that required exchanges to be licensed and limited opportunities for price manipulation by, among other things, making trading information available for the first time to the public. But traders were not regulated and exchanges were too big to punish by suspension for fear it would disrupt the entire market.
The next step taken by Congress was to regulate traders by enacting The Commodity Exchange Act of 1936 (the “CEA”) and forming the Commodity Exchange Authority run by the Department of Agriculture to investigate traders and prosecute price manipulation as a criminal offense; limit speculation; regulate Futures Commission Merchants; ban options on agricultural commodities; and restrict futures trading to licensed exchanges. The CEA was amended in 1968, but it needed a complete overhaul to cope with the growth of futures trading in the late 1960s and early 1970s which is when Congress enacted the Commodities Futures Trading Act of 1974 and established the new Commodities Futures Trading Commission (the “CFTC”) with much greater powers to regulate the commodities futures industry in the United States.
The modern day CFTC now regulates the creation, modification and trading of all futures contracts to promote the industry and protect investors from fraud through misrepresentations and misleading statements, manipulation, fraudulent devices and schemes, cheating, fictitious trades, and misuse of customer funds. The CEA was amended again in 1982 to legalize option trading and end the battle between the CFTC and SEC over who regulated the financial futures and options markets; the CFTC now regulates all futures contracts and options traded on U.S. futures exchanges, while the SEC regulates all financial instrument cash markets and other option markets.
In 2000, Congress amended the CEA once again by enacting the Commodity Futures Modernization Act to increase competition and reduce systemic risk in futures and the over-the-counter derivatives market. The last major revision of the CEA came with the Dodd-Frank Act, which gave the CFTC new enforcement authority over futures, swaps, leveraged precious metal transactions and broader powers to regulate fraud in actual purchases of a commodity known as “spot” or “physical” transactions. In addition to prohibiting misrepresentations, misleading statements and price manipulation, the CEA now prohibits (like the 34 Act Rule 10b-5) “manipulative or deceptive devices or contrivances.”We are Experienced Securities, Commodities and Investment Fraud Lawyers
We are experienced securities, commodities and investment fraud lawyers handling investor complaints against brokerages as well as government and industry investigations and enforcement actions. We work with investors, brokerages, brokers, and traders on both sides of the table because we understand the law and need for skilled representation in legal matters of this complex nature. These disputes should not be left in the hands of general law practitioners.
The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in securities law matters and works tirelessly to secure the best possible result for you and your case. Mr. Pearce provides a complete case review, identifies the strengths and weaknesses of your case, and fully explains all of your legal options. For dedicated representation by a law firm with over 40 years of experience and success in all kinds of securities law and investment disputes serving citizens, nationwide and internationally with disputes under U.S. law, contact the firm by phone at 561-338-0037, toll free at 800-732-2889 or via e-mail.