Corporate Fraud Rules Are Tighter Than You Think

Posted on: 14 November 2019

As hard as it might be to imagine that corporate fraud rules are actually tighter than you may think, you'd be shocked to learn what any securities law attorney would tell you. The regulations governing what counts as fraudulent behavior focus on who is the "maker" of deceptive materials. That seems reasonable, but legal interpretations of just who can be held liable for making fraudulent claims are surprisingly broad. Let's examine this topic more closely from the viewpoint of a corporate lawyer.

"Maker" Is a Big Word According to the Supreme Court

It might be a five-letter word, but maker is a big word when it comes to fraudulent representations. The 2019 Supreme Court decision in Lorenzo v. SEC extended the definition far beyond the originators of frauds. The case centered on the valuation of securities from a waste-to-energy startup. In the case, a banker who was helping his boss draft an email was held liable for frauds perpetrated therein.

The appellant in the case, Francis Lorenzo, was sanctioned for his participation. He was fined $15,000 and barred from working in the securities business for the remainder of his life.

How Do You Protect Yourself?

It cannot be stated strongly enough how important it is to have a securities law attorney review all statements with values attached to them. Even if there's a slim chance anyone outside the company will learn of a valuation, you must include language that explains the nature of the numbers contained within the message. You should also ask serious questions about whether the message is worth sending, who might profit from it, and who might take a loss. Timing is an important consideration, too.

Is This Required at Your Business?

The term security is pretty open-ended, covering an array of negotiable financial instruments issued by companies. While stocks are often the first thing people think of when it comes to securities, other things of value, such as bonds, debts, and voting stakes, can be securities, too. Even actionable business information, such as when a merger might go through, is subject to securities laws.

It's important to note that the size of a company does not exempt it from securities laws. At most, a smaller company is merely subject to less stringent reporting requirements. They may only have to send in annual or semi-annual reports rather than quarterlies, but once they issue stocks, bonds, or other securities, they're on the hook for every statement they make that could move valuations. For more information, contact law firms like Carter West Law firm.