Many states have come up with legislation (“laws”) that compels certain standards in matters involving the offering of and selling securities. These “Blue Sky laws” are intended to protect consumers from being induced into uncertain or overly speculative investments, as well as protecting them against fraud. Each state specifies its own provisions to their Blue Sky laws, however all require that all offerings and sales of securities be registered with the state. Additionally, all brokerage firms and stockbrokers working, or offering securities in the state must register with the designated regulatory agency. To explore this concept, consider the following Blue Sky laws definition.
Definition of Blue Sky Laws
- Laws regulating the sale of stocks, bonds, and other securities for the purpose of protecting the public from fraudulent practices.
History of Blue Sky Laws
In the period leading up to the Great Depression, legislators realized that ordinary people were being induced to invest in extremely speculative ventures, being promised high returns on their money. This lead to both the Great Depression, and the institution of Blue Sky laws early in the 20th century. By 1933, every state, with the exception of Nevada, had enacted such laws. Shortly thereafter, Congress instituted federal legislation governing the securities market.
The establishment of federal laws which partially overlapped many of the state laws, causing a great deal of confusion. For example, both federal and state laws required registration, though each with their own designated agencies. In an attempt to hammer out the wrinkles in the securities plan, the Uniform Securities Act of 1956 was largely adopted by the states, though many state’s laws still vary in many ways.
Modern brokerage firms and securities companies do business in several states, making it still difficult to adhere to federal and state securities laws, as they must comply with the various laws of each state, as well as federal legislation. In response, Congress has updated legislation with the National Securities Markets Improvement Act of 1996 (“NSMIA”). This new legislation transfers control of operating requirements, financial standards, record keeping, and registration of brokers and dealers to the federal agency. Even with their Blue Sky laws, states now have limited power over registration and evaluation of securities.
How Blue Sky Laws Protect Consumers
Oversight and administration of the securities sales process is provided by each state’s securities commission or agency. The securities offered must be registered with the agency, and those involved in trading securities for other people are required to be licensed and registered by the state. Some states even require additional credentials or certifications for stockbrokers, in ensuring their Blue Sky laws protect consumers.
Disclosure and Fraudulent Statements
The registration process enables each state’s securities agency to assess the validity of the transactions, ensuring the investments are regulated and qualified by the state. The information used by both federal and state securities agencies is derived from information provided by the brokerage firms and companies, making full disclosure of information, on both their offerings and sales to investors, a critical factor. To that end, each state’s Blue Sky laws include antifraud provisions that set forth penalties for failure to disclose information, both to the appropriate agencies and consumers, and for making fraudulent statements.
The specific legal remedies available to consumers in fraudulent securities transactions differs from state to state, though most include forcing the broker or seller to surrender their profits from the transaction, cancellation of the transactions, and other damages. A few states, such as New York, do not recognize the right of private investors to take legal action for fraudulent securities sales. In this case, only the state’s Attorney General can bring criminal and civil action for fraudulent securities transactions. Private investors can, however, sue in civil court for breach of fiduciary duty and common-law fraud.
Securities Fraud Cases
While securities fraud has been an issue since the 19th century, the 2008 global financial crisis brought to light a wave of fraudulent activities. Perhaps the most famous securities fraud case born of the era is that of Bernie Madoff.
United States v. Bernard L. Madoff
Bernard “Bernie” Madoff, owner of Bernard L. Madoff Investment Securities LLC since 1960, confided in his sons that the asset management department of the firm was “one big lie,” describing its operation as a giant Ponzi scheme. In 2009 Madoff was arrested and subsequently plead guilty to 11 federal felonies, admitting his Ponzi scheme had defrauded thousands of investors to the tune of $65 billion.
The federal prosecution filed 11 felony charges against Madoff in Manhattan federal court. The charges included securities fraud, investment advisor fraud, wire fraud, mail fraud, perjury, false statements, false filings with the SEC (Securities Exchange Commission), theft from an employee benefit plan, and money laundering. As a result of his violation of both federal securities laws, and state Blue Sky laws, Madoff was convicted and sentenced to 150 years in prison.
Related Legal Terms and Issues
- Ponzi Scheme – a fraudulent investment scheme in which payment to the original investors comes from the investments funds of newer investors. By promising a high rate of return from an investment opportunity that doesn’t actually exist, new investors join in, garnering pay from even newer investors. These scams collapse when the influx of new gullible investors runs out.
- Stockbroker – a registered agent that performs buying and selling of stocks, bonds, and other investments for consumer investors for a fee.
- Brokerage Firm – a company that, through its employed agents and stockbrokers, facilitates the buying and selling of stocks, bonds, and other investments for consumer investors for a fee.