Securities Fraud

Securities Fraud Definition – Everything You Need to Know

Securities fraud is a serious crime that violates laws set to protect investors and financial markets. Victims are often left with significant losses, and many don’t realize they have legal options.

Common types of securities fraud include:

  • High-yield investment scams.
  • Ponzi and pyramid schemes.
  • Advance fee scams.
  • Misconduct by an investment advisor.

Perpetrators can be independent individuals, brokerage firms, corporations, or investment banks.

What is the Enron Scandal?

The securities fraud definition is “a white-collar crime encompassing many illegal activities involving the deception and manipulation of financial markets.” Both individuals and companies can commit securities fraud. It is a crime punishable under 18 USC 1349, and it typically involves making significant misrepresentations or omissions of critical information regarding a stock, investment, or company. It can lead to a substantial prison sentence for those guilty of securities fraud.

Individual perpetrators can include stockbrokers and investment advisors who use insider information to inflate their clients’ portfolios. They may also engage in activities like “pump and dump” schemes, where they buy cheap shares of a small and unknown company and then promote it to others using false or misleading information. These activities are often prosecuted under the federal anti-fraud law, Rule 10b-5, promulgated by the Securities Exchange Act of 1934.

The Enron scandal is a prime example of the risks involved in engaging in securities fraud. The energy company used accounting irregularities to cover up its growing debts, such as taking on debt and building up assets without claiming revenue on the books.

While the executives involved in this fraud disputed knowledge of the irregularities, they were eventually charged with fraud and conspiracy to commit fraud. Investors can protect themselves from securities fraud by recognizing red flags, such as unsolicited offers promising high returns with no risk.

Fraud: What Is It?

A wide range of unlawful actions, including deception or market manipulation, fall under the umbrella term “security fraud.” Both individuals and corporations can adhere to the Securities and Exchange Act Section 10(b) and avoid violating it. It is important to note that the federal government has enacted specific criminal penalties for those who violate this act, which serves as a deterrent for non-compliance. Individuals can be held liable for securities fraud if they knowingly make a material misrepresentation that leads to a loss for a person who relies on that information.

The FBI lists high-yield investment fraud, Ponzi & pyramid schemes, advance fee schemes, foreign currency fraud, broker embezzlement, and hedge fund-related fraud among the most common types of securities fraud. In these crimes, perpetrators may be able to lure people into investing by offering “too good to be true” rates of return on investments or promising low risks with no chance of failure. In addition, fraudsters sometimes create dummy corporations and sell shares in those companies to obtain funds. These profits are then used to pay the high rate of returns promised to earlier investors.

In other cases, corporate officers may not accurately report a company’s financial information, leading to artificially inflated stock prices. It can lead to financial disaster for shareholders if the company collapses. In addition, brokers and other investment advisors who put their economic interests ahead of their clients may be committing securities fraud.

What are the Signs of Fraud?

Many high-level corporate officers commit securities fraud to boost their wealth. They may manipulate the company’s stock price through bogus financial statements, misrepresent or withhold information from auditors, and engage in Ponzi schemes. The infamous Enron scandal was a type of corporate securities fraud. Individuals also commit securities fraud by offering bogus investment opportunities. These include virtual contracts, brokered CDs, equipment leases, promissory notes, factoring, and other unconventional investments that provide high returns with little or no risk.

Independent insurance agents, investment seminar speakers, and private investors are often used as sales outlets for these illegitimate investments. These independent agents need more sophisticated compliance departments and due diligence procedures that large corporations employ to uncover unlawful assets.

Other types of securities fraud are violations of investment advisor or broker fiduciary duties and stock churning. These involve recommending a specific investment for the sake of commissions rather than because it is in your best interest as an investor.

Other illegal activities under the umbrella term of securities fraud include pump-and-dump schemes, insider trading, and embezzlement. These activities are prosecuted under 18 USC SS 1348, which prohibits the sale of securities and other forms of investment contracts. The federal government can charge these acts in addition to state and local prosecutors. If convicted of securities fraud, the defendant faces up to 33 months in prison before considering any aggravating or mitigating offense characteristics.

How Can I Stop Fraud?

Securities fraud can be challenging to spot, but vigilance is essential. Suppose you think you have been the victim of this fraudulent activity. In that case, you should immediately gather all the evidence you can and contact a criminal defense attorney.

Securities are fungible financial instruments representing investors’ rights to income, voting, and other benefits. They include stocks, treasury stocks, bonds, and other debt instruments. The value of securities is derived from market conditions and other extrinsic factors.

Individuals may engage in securities fraud if they use their position of trust to misrepresent information vital to investment decisions. For instance, stockbrokers, brokers, and investment bankers can commit this crime by selling misleading information about a company or using insider information to profit at the expense of investors.

Other types of securities fraud include Ponzi schemes and pyramid schemes. These are characterized by promising high rates of return with little or no risk and collecting advance fees from new investors to pay the returns promised to earlier ones. When the fraudsters run out of new victims, they stop making payments, and the scheme collapses.

Fraudsters often use pump-and-dump schemes by spreading false information online in chat rooms, forums, and email to force a price increase in thinly traded or shell companies’ stocks. Once the price hits a certain point, they “dump” their shares and profit from the sale.


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