• Criminal prosecution: The Department of Justice may bring criminal charges, which can result in long prison sentences and millions of dollars in fines.

• Civil penalties: The SEC can impose substantial civil fines and require the violator to return profits to investors.

• Private lawsuits: Investors can recover their financial losses through settlements or damage awards from civil lawsuits.

• Harm to reputation: Beyond legal penalties, companies and individuals face severe reputational damage that can erode public trust and have lasting business consequences

Understanding Securities Fraud: Definition and Types

• Securities fraud: Refers to a range of deceptive practices in the stock and commodities markets. These practices often involve misrepresentation of information that investors use to make decisions. Fraud can take many forms and is typically aimed at manipulating the market or deceiving investors into making financial decisions that are not in their best interest.

• Core Principles: The core of securities fraud lies in the violation of trust that is central to the functioning of financial markets. It undermines the confidence investors have in the market, which can have significant consequences for both individual portfolios and the economy at large.

• Statistics: Recent statistics from the SEC Enforcement division reveal it recovered $8.2 billion in financial remedies in 2024, the highest annual recovery in SEC history .

Types of Securities Fraud

• Insider Trading: One prevalent type of securities fraud is insider trading, where individuals with non-public, material information about a company buy or sell stocks in violation of their duty to the company and its shareholders.

• Ponzi Schemes: Another common form is accounting fraud, where a company intentionally misstates its financial condition, usually to inflate stock prices. Ponzi schemes, which promise high returns with little risk to investors and pay earlier investors with the capital from newer ones, also fall under securities fraud. These are just a few examples of how securities fraud can manifest, each with unique characteristics but similar in their intent to deceive and defraud investors.

• Complexity: The complexity of securities fraud is further compounded by the various methods perpetrators use to conceal their actions. Technological advancements have introduced new challenges, as fraudsters exploit digital platforms to commit or facilitate fraudulent activities.

• Technology: This evolution necessitates a continuous update in detection and prevention strategies. Understanding the types of securities fraud is the first step in recognizing and combating these illicit activities. It is crucial for investors to be aware of these tactics to better protect their investments and ensure they are making decisions based on truthful and transparent information.

TYPES OF SECURITES FRAUD

Recent High-Profile Cases and Their Impact

High-profile cases

• Change Healthcare Ransomware Attack (2024): In one of the largest healthcare-related ransomware incidents ever, an attack on Change Healthcare exposed the data of at least 100 million Americans. The fallout caused widespread payment disruptions for healthcare providers and pharmacies.

• CDK Global Ransomware Attack (2024): The BlackSuit ransomware group disrupted thousands of car dealerships across the U.S. and Canada, causing significant financial losses for CDK Global and disrupting vehicle sales.

• MoveIT Data Breach (2023): A vulnerability in the MoveIT file transfer software was exploited by the Clop cybercriminal group, affecting over 2,500 organizations and exposing the sensitive personal data of tens of millions of individuals.

• MGM Resorts and Caesars Entertainment Ransomware Attacks (2023): These separate, high-profile attacks by the Scattered Spider group hobbled casino and hotel operations in Las Vegas and resulted in major financial and reputational damage.

Key impacts

• Systemic vulnerabilities: The attacks exposed major flaws in interconnected systems, from healthcare payments to corporate supply chains, demonstrating how a single point of failure can trigger cascading failures across an industry.
• Evolving cyber warfare: Nations and state-sponsored groups are increasingly using cyberattacks to sow chaos and gather intelligence, with cases like the U.S. telecommunications hack in 2024 revealing sophisticated espionage campaigns.
• Third-party risk: Many breaches occurred through vulnerabilities in third-party vendors, highlighting the need for companies to assess the security of their entire supply chain, not just their internal systems.
• Increased financial risk and legal action: Companies face massive recovery costs, regulatory fines, and class-action lawsuits. The attacks have also driven up the cost and tightened the availability of cybersecurity insurance.

Artificial intelligence (AI)

• The rapid adoption of generative AI has produced a wave of high-profile legal challenges, primarily focusing on copyright infringement and ethical concerns.

High-profile cases

• Bartz v. Anthropic (2024–2025): In a landmark copyright case, a federal judge ruled that while using copyrighted material for AI model training may be fair use, illegally acquiring that content is not. The case was later settled for $1.5 billion, the largest-ever copyright recovery.
• The New York Times v. OpenAI and Microsoft (2023): The New York Times sued OpenAI and Microsoft, alleging copyright infringement for using its content without permission to train generative AI models and produce output that competes with its journalism. The lawsuit was folded into a larger multi-district litigation in April 2024.
• Getty Images v. Stability AI (2023): The photo agency sued the AI art generator for using its copyrighted images to train the Stable Diffusion model. This case ttests the limits of fair use for image-generating AI.
• Dow Jones & Co. v. Perplexity AI (2024): Dow Jones sued Perplexity, claiming the AI startup illegally copied its news content for its “skip the links” feature, which bypasses original publishers and diverts web traffic.

Key impacts

• Re-evaluation of copyright: These cases are forcing a re-evaluation of fair use in the context of AI. The outcomes may accelerate the growth of a data licensing market, where AI companies must pay for training data.
• Liability and safety: The growing “agentic era” of AI raises new questions about legal liability when an AI agent makes a mistake. Lawsuits like those against Character.AI highlight the need for “trust and safety” protocols and liability considerations.
• Defining human creativity: Court rulings, such as Thaler v. Perlmutter, affirming that human authorship is required for copyright protection, are defining the intersection of AI and human creativity.
• Regulatory uncertainty: A lack of clear federal regulation has led to increased state-level scrutiny of AI, particularly in sensitive sectors like employment and healthcare. Lawmakers and regulators are using these cases to inform new legislation.

TYPES OF DATA TARGETED BY CYBERCRIMINALS

The Impact of Securities Fraud on Investors and Markets

Impact

• Effects: The effects of securities fraud on investors and financial markets can be devastating. For individual investors, the immediate impact is often financial loss.

• False Information: When investors make decisions based on false or misleading information, they may buy overpriced stocks or sell undervalued ones, leading to significant financial setbacks. Beyond the direct financial loss, securities fraud erodes investor confidence.

• Trust in Market: When trust in the market’s integrity is undermined, investors may become more hesitant to engage, which can reduce market liquidity and overall participation.

Recovery Mechanism:

• Securities class actions have become the primary mechanism through which investors seek recovery for losses caused by corporate fraud.

• In 2024, the average settlement amount in securities class action lawsuits was approximately $42.4 million. The 2015-2023 average settlement amount was $50.7 million.

• The securities litigation process typically involves extensive discovery, expert testimony, and complex damages calculations that can take years to resolve.

THE SECURITIES LITIGATION PROCEESS

The Heighened Pleadings Standards Under the Private Securities Litigation Reform Act of 1995

• The Game Changer: The Private Securities Litigation Reform Act of 1995 (PSLRA) introduced heightened pleading standards in securities fraud cases, requiring plaintiffs to specify the allegedly misleading statements, explain why they were misleading, and state with particularity the facts supporting such claims, especially those made on information and belief. Crucially, plaintiffs must also plead with particularity facts giving rise to a “strong inference” that the defendant acted with scienter (fraudulent intent). 

• Raising the Bar: This higher bar was intended to deter frivolous “strike suits” that injured the economy, though it has been criticized for potentially preventing some meritorious claims from succeeding.

                PRE- AND POST-PSLRA STANDARDS FOR SECURITIES FRAUD LITIGATION

CIRCUIT COURT STANDARDS FOR PLEADING LOSS CAUSATION 

Materiality

• Definition: Information is material if there is a “substantial likelihood that a reasonable shareholder would consider it important in making an investment decision” or if its disclosure would have significantly altered the “total mix” of information available.

• Objective standard: This standard is objective; it considers how a hypothetical reasonable investor would view the information, not how an individual investor viewed it.

• Challenges: Determining materiality can be complex, and courts have found certain types of information, like general optimistic statements or “puffery,” to be immaterial as a matter of law. However, even quantitatively insignificant information can be qualitatively material if it involves fraud, illegal activities, or other significant issues.

• Trends: In cases involving social media and the use of Section 1348 (Title 18 fraud statutes), prosecutors have sometimes argued for a lower materiality standard, focusing on a statement’s capacity to influence any decision-maker, rather than specifically a “reasonable investor”. However, defense counsel can argue that for securities fraud, the standard should remain the “reasonable investor” regardless of the statute used.

What is the “fraud-on-the-market” theory?

• It’s a legal presumption that allows plaintiffs in securities class actions to satisfy the reliance element of a fraud claim (i.e., that investors actually relied on the fraudulent misstatement when making their investment decision) without having to prove individual reliance for every single class member.

• The underlying assumption: The theory assumes that in an efficient market, all publicly available material information (including fraudulent misrepresentations or omissions) is iimmediately incorporated into the market price of a security. Therefore, investors who trade in reliance on the integrity of the market price are presumed to have indirectly relied on the misrepresentation.

• Origins: The theory was officially endorsed by the U.S. Supreme Court in Basic Inc. v. Levinson (1988).

The key “splits” and debates

• Market Efficiency (and rebutting the presumption):

• • The Halliburton II Decision (2014): This was a major Supreme Court case that affirmed the fraud-on-the-market theory but clarified how defendants can challenge it. Halliburton II held that defendants could introduce evidence at the class certification stage to rebut the presumption of reliance by demonstrating that the alleged misrepresentation did not affect the stock’s market price. If the misrepresentation had no price impact, then the integrity of the market price was not affected, and thus there’s no common reliance.

• • Post-Halliburton II Splits/Debates: While Halliburton II provided clarity, it led to new debates in lower courts about the type and quality of evidence required to prove or disprove price impact at the class certification stage. Some circuits have been more receptive to certain types of event studies or expert testimony than others, and there’s ongoing litigation about the methodological requirements for showing price impact (or lack thereof).

• • Example: Debates often revolve around whether an event study showing no price impact on the corrective disclosure date is sufficient, or if courts should consider earlier “inflation-maintaining” misstatements and their initial price impact (or lack thereof).

• Scope of “Efficient Markets”:

• • While the theory generally applies to actively traded securities on major exchanges, there can be debates about whether less efficient markets (e.g., smaller companies, certain foreign markets, or specific types of securities) qualify for the presumption. Courts might scrutinize the “efficiency factors” (like trading volume, number of analysts covering the stock, presence of market makers, etc.) more closely in these cases.

• Applying the Theory in Different Contexts (e.g., State vs. Federal Law):

• • The fraud-on-the-market theory is primarily a federal securities law construct. While many state securities laws mirror federal law, some states have not explicitly adopted the theory or have different standards for proving reliance. This creates potential “splits” in how reliance is proven if cases are brought under state law.

• “Price Maintenance” vs. “Price Impact”:

• • Some litigation has focused on whether a plaintiff must show that the misstatement caused an initial price inflation (meaning the stock price went up due to the lie) or merely maintained an artificially high price. The general understanding is that maintaining an artificial price is sufficient for a claim, but the nuance can be debated, especially concerning the timing of reliance and price impact.

• New Frontier: Section 1348 (Title 18 Fraud Statutes):

• There’s been a recent trend of prosecutors using the federal mail and wire fraud statutes (18 U.S.C. §§ 1341, 1343) and Section 1348 (specifically targeting securities fraud) in cases traditionally brought under federal securities laws (like Section 10(b)).

• • The Potential “Split”: When prosecuting under these broader fraud statutes, prosecutors sometimes argue that they don’t need to prove reliance in the same way as under Section 10(b) of the Exchange Act, or even argue for a different materiality standard (as discussed previously). This creates a tension regarding the applicability of the carefully developed securities law standards like fraud-on-the-market reliance. Defense counsel would strongly argue that even when using Title 18 statutes for securities fraud, the well-established elements and presumptions of Section 10(b) should still apply.

• In essence, while the core fraud-on-the-market theory remains valid, its application is constantly being refined and debated, particularly concerning the evidence of market efficiency and price impact needed to certify a class action. This makes it a very active area of litigation and a frequent subject of appellate review.

• Despite the Supreme Court’s efforts to create a uniform standard in Tellabs, Inc. v. Makor Issues & Rights, Ltd., several circuit splits have continued to exist regarding the interpretation and application of the PSLRA’s heightened pleading requirements. The Supreme Court recently granted certiorari in the case of NVIDIA Corp. v. E. Ohman J:or Fonder AB to address and resolve some of these key disagreements but suquently dismisseal the appeal as improvidently granted.

The main circuit splits concern the following issues:

1. Pleading scienter based on internal company documents

• This is one of the most prominent splits that the Supreme Court would have considered in the NVIDIA case.

• Split: Some circuits require plaintiffs to plead with particularity the actual contents of internal company documents to establish a “strong inference” of scienter. Other circuits allow a complaint to survive a motion to dismiss based on lless-specific allegations about the existence of internal reports, combined with confidential witness accounts or other facts suggesting what those reports might have revealed.
• Example circuit positions:
  • Require particular contents: Second, Third, Fifth, Seventh, and Tenth Circuits.
  • Do not require particular contents: First and Ninth Circuits.

2. The use of expert opinions to allege falsity

• Split: The debate centers on whether a plaintiff in securities litigation can rely on an expert’s post-hoc opinion to satisfy the PSLRA’s requirement for particularized factual allegations of falsity. Some circuits have found that expert opinions cannot substitute for specific facts in the complaint, while others, like the Ninth Circuit in the NVIDIA case, have found otherwise.

• Example circuit positions:

• • Expert opinions cannot substitute for facts: Second and Fifth Circuits.

• • Expert opinions can substitute for facts: Ninth Circuit (position being challenged in NVIDIA).

3. “Collective corporate scienter”

• This split concerns how to determine a corporation’s state of mind when it is alleged in securities class action lawsuits that different employees knew different pieces of information relevant to the alleged fraud.

• Split: Some circuits in securities class action lawsuits have adopted a “collective scienter” doctrine, allowing the knowledge and states of mind of various corporate employees and agents to be aggregated to establish a strong inference of corporate scienter. Other circuits reject or limit this aggregation theory, requiring plaintiffs to tie the scienter to specific, high-level individuals.

• Example approaches:

• • Allowing aggregation: This is not a uniform approach, with courts considering various methods for aggregating knowledge

• • Focusing on key decision-makers: The Sixth Circuit has adopted a middle-ground approach that allows for the aggregation of scienter among key decision-makers but not across the board.

• • Tying scienter to specific speakers: Some circuits require a stronger link to the individual who made the misstatement.

Impact of the splits

• The existence of these circuit splits has created inconsistencies in the adjudication of securities fraud cases across the country. The standard for surviving a motion to dismiss can vary significantly depending on the federal circuit in which a case is filed, which can encourage forum shopping and create uncertainty for both investors and companies.

Destablizing Entire Markets

• Volatility and Uncertaintly: On a broader scale, securities fraud can destabilize entire markets. When fraudulent activities are uncovered, they often result in sharp declines in stock prices, not just for the companies involved but across the market. This can lead to increased volatility and uncertainty, affecting not only individual investors but also institutional investors such as pension funds and mutual fund who frequently server as lead plaintiffs in securities class action lawsuits.

• Entire Enconomy: The ripple effects can extend to the economy as a whole, impacting economic growth and stability. For example, the Enron scandal and the 2008 financial crisis are stark reminders of how securities fraud can have widespread and long-lasting economic impacts.

• Regulary Enforcement: Furthermore, securities fraud can lead to increased regulatory scrutiny and intervention, which can impose additional costs on companies and investors. While necessary to maintain market integrity, these regulatory measures can also slow down market activities and innovation.

• Long-Term Impact: The long-term impact on the market can be a loss of competitiveness and a shift in investor focus towards more heavily regulated, and potentially less innovative, market sectors. Understanding these impacts is crucial for all market participants to appreciate the importance of vigilance and compliance in securities trading.

• Regulatory Compliance: The regulatory framework governing securities fraud is extensive and continually evolving to address new challenges in the financial markets. In the United States, the Securities Act of 1933 and the Securities Exchange Act of 1934 form the cornerstone of securities regulation.

• The Securities Act aims to ensure transparency in financial statements so that investors can make informed decisions, while the Securities Exchange Act established the Securities and Exchange Commission (SEC) to enforce federal securities laws.

The Sarbanes-Oxley Act: A Watershed Moment

• The Sarbanes-Oxley Act of 2002:  Represents one of the most significant pieces of securities legislation in modern history. Enacted in response to major corporate scandals including Enron and WorldCom, this legislation fundamentally transformed corporate governance and internal controls requirements for public companies. The Act established the Public Company Accounting Oversight Board (PCAOB oversight) to regulate auditing firms and created stringent regulatory reporting requirements that companies must follow.

• Under Section 404 of the Sarbanes-Oxley Act, public companies must establish and maintain adequate internal controls over financial reporting. Management must assess the effectiveness of these controls annually, and external auditors must attest to management’s assessment. This requirement has significantly increased the cost of compliance but has also enhanced the reliability of financial reporting. Companies that fail to maintain adequate internal controls face severe penalties, including potential delisting from stock exchanges.

• The Sarbanes-Oxley Act also established ccriminal penalties for securities violations, with CEOs and CFOs facing up to 20 years in prison for knowingly certifying false financial statements. This personal accountability provision has fundamentally changed how corporate executives approach financial reporting and regulatory compliance.

SEC Enforcement and Regulatory Penalties

• SEC Enforcement Actions: Have become increasingly sophisticated and aggressive in recent years. The Commission has expanded its use of data analytics to identify potential violations and has increased coordination with criminal prosecutors. SEC penalties for securities fraud can include disgorgement of ill-gotten gains, civil monetary penalties, and officer and director bars that prevent individuals from serving in executive roles at public companies.

• Recent SEC Enforcement: Ttrends show a particular focus on accounting fraud cases involving revenue recognition, expense manipulation, and asset valuation issues. The Commission has also prioritized cases involving disclosure failures related to cybersecurity, climate risks, and other emerging areas of concern for investors.

Securities Class Actions and the Litigation Process

• Securities class actions: Serve as a critical enforcement mechanism that complements government regulation. These lawsuits allow investors who suffered losses due to securities fraud to band together and seek compensation from companies and their executives. The securities litigation process typically follows a predictable pattern that can span several years.

• Litigation Process: The process begins when a company’s stock price declines following disclosure of negative information. If investors believe the company previously made material misrepresentations, they may file a securities class action lawsuit alleging violations of federal securities laws. The court then determines whether to certify the case as a class action, allowing all similarly situated investors to participate in the lawsuit.

• Securities class action lawsuits often result in substantial settlements These settlements provide compensation to investors while also serving as a deterrent to future corporate misconduct.

Corporate Governance and Internal Controls

• Effective Corporate Governance: Serves as the first line of defense against securities fraud. Companies with strong governance structures, including independent boards of directors, robust audit committees, and comprehensive internal controls, are significantly less likely to experience fraud-related problems. The integration of ethical guidelines with operational controls creates multiple layers of protection against fraud and misconduct.

• Internal Controls: Encompass the policies and procedures companies implement to ensure accurate financial reporting and compliance with applicable laws and regulations. These controls must address authorization of transactions, segregation of duties, proper documentation, and regular monitoring of financial activities. Companies that invest in comprehensive internal controls systems not only reduce their fraud risk but also improve operational efficiency and regulatory compliance:

• The Importance of Corporate Governance: Extends beyond fraud prevention to encompass broader stakeholder interests. Companies with strong governance practices typically experience better long-term performance, lower cost of capital, and enhanced reputation in the marketplace. Investors increasingly consider governance factors when making investment decisions, recognizing that strong governance correlates with sustainable business success. The beneifits of stong internal controls and corporate governance are worth not pulling the trigger to securities litigation.

Prevention Strategies and Regulatory Compliance

• Regulatory compliance: Requires a proactive approach that goes beyond merely meeting minimum legal requirements. Companies must develop ccomprehensive compliance programs that address the specific risks in their industry and business model. These programs should include regular risk assessments, employee training, monitoring systems, and clear escalation procedures for potential violations. They must implement strong internal controls.

• Employee education plays a crucial role in fraud prevention: Companies must ensure that all personnel understand their responsibilities under securities laws and company policies. This education should cover not only what constitutes securities fraud but also the reporting mechanisms available for employees who observe potential violations. Whistleblower programs, protected under various federal laws, provide important channels for early detection of fraudulent activities.  This is accoumplished by created a strong corporate governanced framework.

• The Importan Role of Technology: Technology increasingly plays a vital role in fraud prevention and detection. Advanced analytics, artificial intelligence, and blockchain technologies offer vital role in fraud prevention and detection.transactions, identifying unusual patterns, and maintaining accurate records. Companies that leverage these technologies effectively can significantly enhance their ability to prevent and detect securities fraud.

• The Cost Pays Off in Long Term Sucees: The cost of prevention invariably proves far less than the price of remediation. Companies that experience securities fraud face not only SEC penalties and securities class action settlements but also increased audit costs, higher insurance premiums, difficulty accessing capital markets, and long-term reputational damage. By implementing comprehensive prevention strategies, companies protect themselves from these devastating consequences while building sustainable competitive advantages.

Future Outlook and Emerging Challenges: Internal Controls and a Strong Corporate Governance Framework

• Evolving Landscape: The landscape of securities regulation continues to evolve in response to new technologies, changing business models, and emerging risks. Regulatory enforcement agencies are adapting their approaches to address cryptocurrency fraud, artificial intelligence-related disclosures, and environmental, social, and governance (ESG) reporting issues. Companies must stay abreast of these developments to ensure ongoing regulatory compliance and strong internal controls and a robust corporate governance frameword.

• Glogal Litigation Landscape: Securities Fraud and Securities Litigation is increasing, creating more consistent global standards for internal controls and fraud prevention. This harmonization benefits multinational companies by reducing compliance complexity while enhancing investor protection across borders.

• The Future Lies in Robust Corporate Governance Frameworks: As we look toward the future, the intersection of technology and regulation will continue to shape the securities fraud landscape. Companies that embrace transparency, invest in robust internal controls, and maintain strong corporate governance practices will be best positioned to navigate these challenges successfully. The investment in effective controls represents not merely a compliance obligation but a fundamental business imperative that supports long-term success and market confidence. Companies looking for long-term sucees must implement robust corporate governance frameworks.

• Regulatory Enforcement: By understanding these complex dynamics and implementing comprehensive prevention strategies, investors and companies can work together to maintain the integrity of our financial markets while fostering innovation and economic growth. The ongoing evolution of securities litigation and regulatory enforcement ensures that those who violate securities laws face meaningful consequences, while those who operate with integrity benefit from enhanced market confidence and investor trust.