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Defending a charge of securities fraud

With the growing popularity and accessibility of the stock market, securities fraud is now one of the most common types of fraud charges filed. Because of the unpredictable fluctuation of the stock market, alleged victims will have to prove more than just a loss of money. Several theories can be used to support a securities fraud claim, each of which contains possible defenses.

Securities fraud is when a stockbroker (or other industry representative) makes a claim that they either know, or should know, is untrue and an investor relies upon that claim, consequently suffering monetary damages. This can be proven through direct or indirect evidence of reliance, or evidence of omission.

Direct evidence of reliance may consist of a deceptive statement in an advertisement or contract. If the investor cannot show they made their investment decision because of the deceptive statement, then it will not be an adequate showing of direct evidence.

Indirect evidence of reliance can be shown in connection with the fraud-on-the-market theory, often applied in situations when the price of a certain stock was artificially inflated. In that case, the misrepresentation was made to the entire market and courts assume that the investor bought the stock based on that widespread misrepresentation.

The defendant can discredit this indirect evidence by showing that the misrepresentation did not actually affect stock prices or that the investor knew the statement was false. Another defense entails showing that even if the investor knew the statement was false, they would have bought the stock anyway.

Evidence of omission does not require proof of reliance. Rather, courts will assume that reliance existed if the omitted facts could have reasonably been expected to affect the investor's decision.

This presumption can be overcome by showing that the investor's decision was not in fact influenced by the omitted facts because they would have made the same decision even if the omitted fact was disclosed. Proving that the investor did not read the advertisement or contract is an example of how this can be accomplished.

Reliance by an investor upon stockbroker misrepresentations is just one type of securities fraud. Insider trading is another, just as complex, form of fraud. Those charged with any type of fraudulent wrongdoing may benefit from being familiar with fraud generally, as well as applicable defenses for their specific alleged crime.

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