SECURITIES & SHAREHOLDER LITIGATION

Business owners and corporate board members or executives need to be mindful of potential litigation if some party in their organization does something that brings on a shareholder lawsuit or an investigation for securities violations. A shareholder dispute can lead to a lawsuit, while securities violations can bring on government agencies to investigate and levy potential criminal charges.   

Neither prospect is anything a business owner, corporate executive, or board of directors likes to ponder, but sometimes disputes arise, or perhaps securities fraud is committed, and suddenly, a day of reckoning in a courtroom looms large. 

If you or your business is facing a shareholder derivative lawsuit or legal action over a securities violation in or around the Greater San Francisco Bay Area, contact the business litigation attorney at the Law Offices of David H. Schwartz, INC. Attorney David H. Schwartz has more than 45 years of experience in defending businesses and corporations against legal actions that threaten to disrupt their operations or create a serious setback. 

The Law Offices of David H. Schwartz, INC. also proudly serves clients in San Jose, Santa Clara, San Mateo, Oakland, and throughout Alameda County. 

What Is Securities Fraud? 

Securities fraud involves deceptive or fraudulent activities toward stocks and commodities trading, corporate bonds, U.S. Treasury bonds, and financial notes of all types. The two most common types of securities fraud are employing questionable schemes to induce others to purchase a financial instrument and embezzling financial instruments (basically, theft). 

The first type uses ruses, lies, and false promises to promote sales, and the second type relies on schemes to secure ownership of what doesn’t belong to the embezzler. Accounting fraud can play into embezzlement schemes. Suddenly, a whole slew of investments suddenly disappears from the company’s books with falsified entries to cover up the embezzlement. 

Another corporate ploy might be to release information of questionable veracity to pump up the price of the business’s stock. Once people fall for the ruse and buy the stock, the company – or the bad actor or actors therein – sell the stock at the higher value and rake in the profits, while the stock itself eventually plunges when reality sets in. 

A Ponzi Scheme, as exemplified by Bernie Madoff, involves selling nonexistent investment portfolios, and then using the proverbial “Rob Peter to pay Paul” method to pay those who wish to cash out. In other words, money is taken from new investors to cash out those who wish to close their accounts or take their profits. Meanwhile, falsified statements are issued to customers. 

State and federal legislation both cover securities fraud. The U.S. Securities and Exchange Commission (SEC) is the top watchdog for securities fraud. SEC investigations can lead to criminal charges, as they did in the case of Bernie Madoff. 

Shareholder Disputes 

Shareholders of a corporation – those who hold the stock – own the business. The management team and the board of directors who are empowered to oversee the executives running the company actually work for the shareholders. Shareholders can, by law, take action to force those running the corporation, including executives and board members, to correct adverse decisions or actions that are viewed as harming the company’s operations and/or future prospects. 

This could be an executive who undertakes a costly takeover bid for another company that drags on and on and drains the corporate coffers – a high-risk gamble that backfires – but even on an everyday level, shareholder disputes of company operations can lead to legal actions.  

For instance, differences over the direction of the company, a breach of fiduciary duty, accounting problems, an executive or board member with a conflict of interest, a breach of a shareholder agreement, unjustified compensation for executives – all these can result in what are called shareholder derivative lawsuits. 

Filing a Shareholder Derivative Lawsuit 

Any shareholder, acting on behalf of other shareholders, can file a shareholder derivative lawsuit. Say the company is wasting money on consultants who bring no value to the business. A shareholder, or shareholders, view this as a colossal waste of assets. One shareholder decides to organize a legal remedy.

In California, however, before you can file a shareholder lawsuit, you must first give the board notice of the issue. If the board ignores or rejects the notice or otherwise fails to act on the situation, then the shareholder can seek a lawsuit. 

The California Corporations Code specifies in this regard: “The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.”  

Further, the shareholder filing the action may have to post a bond to proceed with the lawsuit. The California Code of Civil Procedure states that “the corporation or the defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish a bond as hereinafter provided.” The corporation can fight back by making the lawsuit too expensive. 

Lawsuits can be both a time and money killer. They can also leave a company’s reputation in tatters, especially if the SEC gets involved. The best practice is to vigilantly monitor everything being done by those in your business structure to prevent the prospect of a shareholder derivative lawsuit or worse, a criminal investigation or charge by the SEC.