Fraud and Embezzlement — Civil Recovery in Washington, DC

Businesses rely on investors to fund growth, acquisitions, and day-to-day operations. Investors, in turn, rely on accurate information about the business and the investment. When materially false or misleading information is used in connection with the purchase or sale of a security, the resulting dispute may give rise to a securities fraud claim. These disputes can affect investors, business owners, companies raising capital, and the people responsible for communicating with investors.

Not every unsuccessful investment is securities fraud. A business can fail, an investment can lose value, and a forecast can prove wrong without anyone committing fraud. The central questions are whether there was legally actionable deception and whether the investor can establish the other requirements of the particular claim.

This page focuses on private civil claims under federal securities law, particularly Section 10(b) of the Securities Exchange Act and Rule 10b-5. Other securities claims may have different requirements. A private civil claim seeks relief for an injured investor; it is distinct from government enforcement or a criminal prosecution.

Key takeaways

• A securities fraud claim may arise when materially false or misleading information is used in connection with the purchase or sale of a security.
• Not every unsuccessful investment is securities fraud.
• Securities fraud cases typically focus on claims under federal securities law, particularly Section 10(b) of the Securities Exchange Act and Rule 10b-5.

What Does a Securities Fraud Claim Require

A standard securities fraud claim involves establishing six elements:

The six elements at a glance

1. Did the Transaction Involve a Security?

Before evaluating securities fraud, it is important to determine whether the investment qualifies as a security. Securities include familiar investments such as stocks and bonds, but the concept also reaches certain investment arrangements that do not look like traditional stock-market transactions.

One important category is an investment contract. Under the Supreme Court’s Howey framework, this involves an investment of money in a common enterprise with an expectation of profits from the efforts of others. The economic substance of the arrangement matters more than the label the parties give it. See SEC v. W. J. Howey Co., 328 U.S. 293 (1946).

For that reason, an interest in a privately owned business may qualify as a security, depending on how the investment is structured and the investor’s role. However, an ownership dispute is not automatically a securities dispute simply because someone purchased an interest in a company.

2. Was There a Material Misrepresentation or Actionable Omission?

•  What Is a Material Misrepresentation?

A misrepresentation is a false statement. In an investment dispute, it might concern current revenues, existing customers, assets, liabilities, or how investment funds will be used.

The statement must also be material. That means there is a substantial likelihood that a reasonable investor would consider the information important and that it would significantly change the overall information available about the investment. Not every error or inaccuracy meets that standard. See Basic Inc. v. Levinson, 485 U.S. 224 (1988).

•  How Is an Omission Different?

An omission involves leaving information out rather than making an expressly false statement. Liability requires a legal basis for disclosure, not merely an investor’s belief that more information would have been useful.

For a private securities fraud claim under Rule 10b-5(b), the critical question is whether the omitted information was necessary to keep an affirmative statement from being misleading. A statement can be literally true but still mislead because it leaves out an important qualification—a half-truth.

For example, describing revenue from a major customer without revealing that the customer has already terminated its contract may create a misleading impression, depending on the wording and circumstances. By contrast, pure silence does not support a Rule 10b-5(b) claim simply because another rule required disclosure. Other legal provisions may treat omissions differently. See Macquarie, 144 S. Ct. 885 (2024).

3. Did the Defendant Act With the Required Wrongful State of Mind?

A private Rule 10b-5 fraud claim requires scienter, a legal term for the required wrongful state of mind. An innocent mistake or ordinary negligence is not enough for this fraud claim.

The inquiry focuses on what the defendant knew and the circumstances surrounding the challenged statement or conduct. It is not enough to conclude, with hindsight, that an investment was unsuccessful. See Dura, 544 U.S. 336 (2005).

Federal law also imposes demanding pleading requirements. The complaint must identify the misleading statements, explain why they were misleading, and state particular facts supporting a strong inference of the required state of mind. See 15 U.S.C. § 78u-4(b)(1)–(2).

4. Was the Deception Connected to a Purchase or Sale, and Did the Investor Rely on It?

A Rule 10b-5 securities fraud claim requires a connection between the alleged fraud and a purchase or sale of a security. The investor must also establish reliance—the link between the misleading information and the investment transaction. See Dura, 544 U.S. 336 (2005).

In a direct investment transaction, the investor’s communications with the seller and review of investment materials may be important evidence. In qualifying public-market cases, reliance may be presumed because public misinformation affected the market price at which the investor traded. This presumption is subject to requirements and can be rebutted; it is not automatic in every case. See Basic, 485 U.S. 224 (1988).

5. Did the Fraud Cause an Economic Loss?

Reliance and loss causation address different questions. Reliance concerns why the investor entered the transaction. Loss causation concerns whether the alleged fraud caused the financial harm.

An investor cannot establish loss causation merely by showing that a security was purchased at an artificially inflated price. The investor must connect the deception to an actual economic loss. A decline caused by general market conditions or unrelated business developments is not automatically recoverable as securities fraud damages. See Dura, 544 U.S. 336 (2005) and 15 U.S.C. § 78u-4(b)(4).

6. What Damages and Other Remedies May Be Available?

The available recovery depends on the statute, the transaction, and the evidence. Different remedies should not be treated as interchangeable.

Compensatory Damages

Compensatory damages reimburse an investor for proven financial harm caused by the violation. They do not automatically equal the entire amount invested or every subsequent decline in value. Recovery under the Exchange Act is limited to actual damages, and additional statutory limits apply when damages are measured by reference to a security’s market price. See 15 U.S.C. § 78bb(a) and 15 U.S.C. § 78u-4(e).

Rescission or Statutory Recovery of the Purchase Price

Rescission means unwinding a transaction rather than simply awarding damages. Certain securities claims provide a purchase-price recovery upon returning the security, subject to statutory requirements and adjustments.

For example, Section 12 of the Securities Act provides specified purchasers with recovery of the consideration paid, with interest and less income received, upon tendering the security; it provides damages where the purchaser no longer owns it. This is a separate statutory remedy, not an automatic remedy for every Rule 10b-5 claim or private investment dispute. See 15 U.S.C. § 77l(a)–(b).

Punitive Damages

Punitive damages punish misconduct rather than reimburse a loss. They are not available under the Exchange Act’s private damages framework, which limits recovery to actual damages. The availability of additional remedies under a separate claim must be evaluated under that claim’s governing law. See 15 U.S.C. § 78bb(a).

Attorney’s Fees and Litigation Costs

Attorney’s fees should not be assumed to be an additional recovery simply because an investor prevails. Any basis for shifting fees requires separate analysis. In securities class actions, court-awarded plaintiff counsel fees and expenses are subject to statutory limits tied to the recovery paid to the class. That is different from automatically requiring a defendant to reimburse every investor’s legal bills. See 15 U.S.C. § 78u-4(a)(6).

Where does Waxman Litigation handle securities fraud claims?

Waxman Litigation handles securities fraud claims in Washington, DC, Maryland, Virginia, and New York from its office in Chevy Chase, Maryland.