Who are the typical defendants in a securities claim?

The defendants to a securities claim can vary based upon the type of claim being brought and the venue in which it is being brought.  As a general rule, defendants fall into two categories:  (1) issuers of securities; and (2) third parties who recommend, solicit or cause investors to purchase securities. 

Issuers:  The “issuer” is the company behind the security, whether a stock, bond, LLC membership interest, partnership interest or some other form of investment.  As an example, Coca-Cola stock is “issued” by the Coca-Cola Company.  The issuer need not be a major public company.  Smaller companies, partnerships and other investment vehicles also issue securities to be purchased by members of the public in order to raise money.  

When companies, regardless of size, seek to issue securities, these companies must provide investors with written information about the investment, usually called a prospectus or offering memorandum.  Securities claims against issuers usually focus on lies or other fraud in connection with the prospectus or offering memorandum.   In other words, the investor claims that the issuer fraudulently induced him or her to purchase the security based on fraudulent information in the prospectus or offering memorandum.   These types of claims are often brought as class actions, depending on the number of investors.  These types of claims are normally brought in court, not in arbitration. 

Third Parties: Next, investors may have claims against third parties (apart from the issuer), who advise, recommend or cause the investor to purchase the security. These defendants often have a financial motivation to induce the investor to purchase the security at issue.  Common third-party defendants include: 

  • Broker-dealer firms, such as Merrill Lynch, Smith Barney, UBS, etc.
  • Registered Investment Advisors
  • Banks and Bankers
  • Trust Companies and Trustees
  • Insurance Companies and Agents
  • Securities Underwriters
  • Securities Promoters

Third-party claims usually focus on fraud or negligence in connection with the recommendation to purchase a given security or with information provided in connection with the security.  The venue for third-party securities claims usually depends on whether or not an arbitration contract exists between the plaintiff and the defendant.  Almost all broker-dealer firms, for example, require their customers to sign an arbitration provision when the customer opens an account with the firm.  This means that claims against broker-dealer firms must usually be filed in arbitration rather than in court.  If no arbitration contract exists, claims can be filed in court.

Please Note:  McCabe Rabin, P.A. provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice.  If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.