Individual Recovery for Promoter’s Fraud Procedural Problems under S.E.C. Rule 10b-5
Recovery by an individual investor for the fraudulent practices of corporate promoters has been difficult. The typical case arises when the promoter, acting through a controlled board of directors, causes the corporation to issue stock to him in return for inadequate consideration. Stock is then sold to the public without disclosure of the earlier sale to the promoter. The investor who buys into the corporation expecting to share proportionately in the assets finds that he gets farless because the transfer to the promoter has caused dilution of the stock's value.If the fraud is discovered and the individual stockholder attempts to seek redress,he is often deterred by the financial risks involved in maintaining a private suit,especially since his potential recovery will be limited by the number of shares he holds. Prior to the Securities Act of 19332 and the Securities Exchange Act of19343 the defrauded investor was limited to remedies available under state o rcommon law. While state blue...