Question about securities fraud?

Discussion in 'Growing and Managing a Business' started by bsteves33, Oct 24, 2013.

  1. bsteves33

    bsteves33
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    I want to state ahead of time that my business is not publicly traded on any market! So if I draft a document which would hereby give a 10% stake in my company to an investor "this is not a stock! more like a proof of sale contract" in exchange for $50,000. I tell the investor I am purchasing high quality stocks to make strong returns on their investment. Then i turn around and buy 50k worth in stock, then liquefy the company and all of it's assets for 40k, give the investor 10% of it's value or $4,000 since that's what they own, while I keep the other $36,000. Would that be considered securities fraud? I don't lie to the investor, I'll tell them that they are not 100% guaranteed a profit. and since I actually did buy stocks like I said I would I'm not lying. Could I be criminally charged for this? or could the investor sue me for their losses?

    I know what you might be thinking..... no one would give me 50k...... just ignore that possibility. Assuming they did give me the money. would such a process be legal?

    Also I have double check and yes it is legal to sell someone stake in your company via contact without have to be publicly traded or using a broker.
     
  2. bsteves33

    bsteves33
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    BTW I'm not trying to commit securities fraud lol........... This is a question that was asked by my business prof.... I'm not sure what the answer is, sounds like it would be legal to me.
     
  3. Fergal

    Fergal
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    Obviously different countries have different laws and a lot would depend on the country this action would be carried out in. However, I would say that as well as being extremely unethical what you are suggesting would also be illegal in most countries. I don't know the exact legalities, but in most jurisdictions, it is a crime to set out and deliberately take money from someone under false pretences.
     
  4. bsteves33

    bsteves33
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    Hmmm.... That's what I thought, but it's not really false pretenses. I could tell you that my car company is the bust in the world and that my cars will out preform any other on the road. While in reality my cars could be crap. I can still sell my car to you at top dollar if your willing to buy it and that isn't fraud.

    From what I looked up on securities fraud it is only fraud if you say you are going to buy the stocks and then use the money to buy something else.
     
  5. Fergal

    Fergal
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    Personally I would say that it is most definitely false pretences. You would be telling the client that you are "purchasing high quality stocks to make strong returns on their investment" when in reality you have no intention of doing that.

    When you promote and sell a product, the consumer has legal protection. To use your car example, telling a customer that a car can do 60 miles per gallon and a max speed of 120 miles per hour, when selling them a car, is against the law in most countries, if the car cannot in fact reach those levels of performance.
     
  6. bsteves33

    bsteves33
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    Unlike a car it's impossible to know how a stock will preform in the future, if I buy the stock and they preform well then thats great but if they fail then I will simply liquify the company..... That isn't really false pretenses.
     
  7. Fergal

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    You said in your first post that you would "liquefy the company" after you purchased the stock. This gave me the impression that the investor was going to lose out, regardless of the performance of the stock in question. Perhaps I'm misunderstanding something, but if the investor has no chance of making a profit, but is under the belief that s/he could potentially make a profit, then in my opinion it is false pretences.
     
  8. bsteves33

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    well yes the company will be liquefied regardless of whether the stock goes up or down.... That's basically the business model. So yes it is essentially false pretenses, but I was trying to figure out whether this is illegal or not. Those power bands that supposedly help people increase their balance don't really do anything, it's technically a false pretense but it's not illegal.
     
  9. ArcSine

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    When you accept investors' capital, there is a doctrine of fiduciary duty imposed on you, whereby you're obligated to put forth your best efforts at managing their capital prudently. Buying a portfolio of stocks for 50K then cashing it all out for 40K prior to any serious effort at an intelligent management of that capital, is a breach of that fiduciary duty.

    The investors would sue for that breach and under the conditions you described, would win.

    But as pointed out in the opening post it's purely a rhetorical thought experiment, since any actual investment fund agreement would not have the GP receiving some %-age of the total liquidation proceeds, but rather sharing in just the gains or losses generated on the invested capital. With the portfolio being sold at a loss, the entire 40K would go back to the limited partners, less perhaps some fixed management fee to the GP.
     
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    #9 ArcSine, Oct 27, 2013
    Last edited: Oct 27, 2013
  10. bsteves33

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    Does McDonalds for instance have a legal duty to turn a profit for the people that buy their stocks? If the ceo of McDonalds ran the company in such a way that he made a profit at the expense of the share holders I don't think he/she could be criminally charged for it. Granted they would probably get fired but I'm not sure that he/she could be sued or jailed for such actions.
     
  11. ArcSine

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    Legal duty to turn a profit? Of course not. Legal duty to uphold their fiduciary duty to put their shareholders' best interests ahead of their own? Yup.

    Tell it to Madoff.
     
  12. bsteves33

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    madoff is a totally different scenario, he took money from one investor and gave it to another telling them it was profit.
     

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