Victims of securities and investment fraud can sue for a variety of civil damages. The Securities Exchange Act of 1934 gives the SEC a broad scope and authority over securities violations, including eliminating securities fraud. This rule also provides private citizens a cause of action against entities for related securities fraud violations. Moreover, claims under this rule give the private citizen a way to recover and collect damages for SEC Rule 10b-5 violations.
What is SEC Rule 10b-5?
The SEC Rule 10b-5 otherwise referred to as Employment of manipulative and deceptive devices, is codified in the CFR § 240.10b-5.
Under this rule, it is unlawful for any person to directly or indirectly to:
- Employ any device, scheme, or artifice to defraud;
- Make false statements of a material fact or omit to state such material fact necessary to make the statements made be not misleading; or
- Engage in any action, practice, course of business that operates or would operate as a fraud or deceit upon any potential buyer or seller of any security.
Generally, private citizens have a cause of action against companies, entities, and individuals under SEC 10b-5 for the following violations:
- Insider trading
- Market manipulation
- Fraud in connection with public offerings, takeovers, or in connection with the buying or selling of securities.
What Are the Damages Available Under SEC Rule 10b-5?
The aim of compensatory damages lies in compensating the plaintiff for the loss they had incurred due to the defendant’s wrongful act. This type of damage would typically cover the actual damages that the plaintiff has suffered from the purchase or sale of the security.
The following are included in the compensatory damages:
- Gains or profits that the plaintiff would have made if the defendant did not do the wrongdoing
- The purchase price and fees paid by the plaintiff
- The true value of the plaintiff’s security
Some of the measures for damages under compensatory damages include:
- Out-of-Pocket Damages – This refers to the difference between the contract or paid price by the plaintiff and the actual value at the time of the date of sale.
- Cover Measure – This allows the defrauded seller to recover the difference between the highest value of the security within a reasonable time the plaintiff had discovered the fraud or reasonably should have been discovered.
The aim of punitive damages, or exemplary damages, is to punish the defendant for their wrongdoing and deter others from engaging in similar wrongful conduct.
This type of damage may include:
- Civil penalties for any profits or gains obtained by the defendant from the illegal transaction
- Additional monetary payment paid by the defendant to the plaintiff on top of the other damages
The court typically applies this type of damages to cases where the defendant has engaged or acted outrageously or maliciously. Thus, in theory, this damage would set an example for others not to follow.
The rescission remedy aims for the court to attempt to return the defendant and the plaintiff to the status that they were in before the contract was made.
However, the application of this type of damage may vary. The rescission applies by either:
- Voiding the agreement
- The plaintiff can elect for the defendant to fulfill the contract
For this type of remedy to apply, the plaintiff must file their claim for rescission soon after discovering the fraud.
If you or someone you know believes you were a victim of securities fraud and you would like to know more about the legal damages you may be entitled to recovery, please call us at 212-203-9300 for a free and confidential consultation.