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Does securities fraud require reliance and causation?

On Behalf of | Jul 5, 2022 | Fraud, Securities |

Defining securities fraud

Securities fraud is a very broad term covering several illegal activities in the marketing and sales of various investments. According to the FBI, securities fraud can include a variety of pyramid schemes, broker embezzlement schemes, high-yield investment and Ponzi schemes, advanced-fee schemes, and more. As the headquarters of some of the largest investment funds and capital markets in the United States, New York is also home to its share of high-profile securities fraud cases.

The role of “reliance” in securities fraud

The requirement of reliance in establishing securities fraud centers around the ways in which investors used the allegedly fraudulent information. Did investors rely on phony figures before making a final decision on whether or not to invest? Reliance can be difficult to prove, but other circumstances around the case can make this requirement present by default.

When a securities fraud case involves omissions judged to be materially significant, reliance is assumed. The rationale for presuming reliance in such cases stems from the impossibility of explicitly proving the requirement for a non-existent statement. In other words, the court often assumes that an investor would have relied on such information if the defendant did not omit this information.

How does reliance relate to “causation” in establishing securities fraud?

Causation, the requirement that the investor suffered a loss due directly to a fraudulent statement or material omission, is intimately related to reliance. After all, misleading statements can only cause investor losses if an investor was relying on such statements in the first place.

Establishing causation

Usually, an investor or group of investors acting as the plaintiffs in a securities fraud case must establish both “loss causation” and “transaction causation.” Loss causation is the requirement that the fraud had a direct impact on the price of the security. Transaction causation, on the other hand, is the requirement that the misleading statements played a causal role in the investor completing the transaction.

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