Wednesday, June 23, 2010

Criminal Liability of Stock Brokers: Full Disclosure of Material Information

The 9th circuit court of appeals ruled on June 16th that securities brokers must disclose material information regarding a stock purchase if the broker has a fiduciary relationship with a client.

Hampton Porter Investment Bankers, LLC, became involved in a “pump and dump” scheme that resulted in “bonus commissions” for sales of “house stocks.” “House stocks” are those that were granted to Hampton Porter for either extremely discounted prices or for free and then driven up in price when clients were pressured into purchasing them, strongly discouraged from selling them, or simply ignored when clients made sales orders.

According to Section 10(b) of the Securities Exchange Act of 1934, it is illegal to use any manipulative or deceptive device in connection with a purchase. Rule 10b-5 states that it is illegal to “defraud, to make any untrue statement of, or omit to state, a material fact, or to engage in any course of business which operates as a fraud or deceit upon another in connection with the purchase or sale of a security.”

The court found that the overall “pump and dump” scheme was a separate violation of Rule 10b-5 from failure to disclose bonus commissions. Additionally, the Brokers’ failure to disclose was circumstantial evidence of their agreement to be part of this conspiracy.


The case is United States v. Laurienti, 07-50240