Stock Lawyer Stock Broker Fraud Lawyer 3 — Questions and Answers
Question 1: Which federal agency has primary authority to bring civil enforcement actions against securities fraud perpetrators?
- Securities and Exchange Commission (SEC) (Correct answer)
- Financial Industry Regulatory Authority (FINRA)
- Federal Trade Commission (FTC)
- Office of the Comptroller of the Currency (OCC)
Correct answer: Securities and Exchange Commission (SEC)
The SEC is the primary federal civil enforcement authority for securities fraud, with the power to seek injunctions, disgorgement, and civil penalties.
Question 2: What is 'frontrunning' and why is it illegal?
- Trading for personal accounts based on knowledge of pending client orders before executing those orders (Correct answer)
- Recommending hot IPO stocks before they are publicly available
- Filing a lawsuit before regulatory arbitration is complete
- Selling securities before disclosing material negative news to the public
Correct answer: Trading for personal accounts based on knowledge of pending client orders before executing those orders
Frontrunning involves a broker trading their own account based on advance knowledge of pending client orders, exploiting information that should be used solely to benefit the client.
Question 3: Under the Securities Exchange Act of 1934, what is the statute of limitations for private SEC Rule 10b-5 fraud claims?
- 2 years from discovery of the fraud, but no more than 5 years after the violation (Correct answer)
- 1 year from the date of the transaction
- 6 years from the date of discovery
- 10 years from the date of the violation
Correct answer: 2 years from discovery of the fraud, but no more than 5 years after the violation
Under 28 U.S.C. § 1658(b), private Rule 10b-5 claims must be filed within 2 years of discovery of the fraud and no later than 5 years after the actual violation.
Question 4: What is the role of a 'receiver' appointed by a court in a securities fraud case?
- To take control of a fraudulent operation's assets and distribute them to victims (Correct answer)
- To represent the defendant's interests during SEC investigations
- To manage FINRA arbitration proceedings on behalf of the claimant
- To conduct independent audits required by the Securities Act of 1933
Correct answer: To take control of a fraudulent operation's assets and distribute them to victims
A court-appointed receiver takes control of a fraudulent enterprise's assets, winds down operations, marshals funds, and distributes proceeds to defrauded investors.
Question 5: Which type of stockbroker misconduct involves a broker placing client funds in investments that benefit the broker's related parties at the client's expense?
- Self-dealing (Correct answer)
- Misrepresentation
- Wash trading
- Spoofing
Correct answer: Self-dealing
Self-dealing occurs when a broker directs client assets into investments that personally benefit the broker or their associates, creating an undisclosed conflict of interest.
Question 6: In a FINRA arbitration case, which document officially starts the claim process and sets out the investor's allegations?
- Statement of Claim (Correct answer)
- Form U5
- BrokerCheck complaint
- SEC Form 10-K
Correct answer: Statement of Claim
The Statement of Claim is the formal document an investor files with FINRA to initiate arbitration, setting forth the facts, allegations, and damages sought.
Question 7: What remedy is designed to prevent a fraudster from profiting from illegal gains in an SEC enforcement action?
- Disgorgement (Correct answer)
- Injunction
- Rescission
- Subrogation
Correct answer: Disgorgement
Disgorgement requires fraudsters to return ill-gotten profits; the Supreme Court in Liu v. SEC (2020) confirmed it remains a valid equitable remedy when limited to net profits.
Stock Lawyer Stock Broker Fraud Lawyer 3
Which federal agency has primary authority to bring civil enforcement actions against securities fraud perpetrators?