Securities Fraud

Generally, securities fraud occurs when someone makes a false statement about a company or the value of its stock, and others make financial decisions based on the false information. In cases of insider trading, insiders (i.e., executives, board members, etc.) buy or sell stocks based on information that isn't available to the public. 

Although the crime isn't complicated, it requires understanding securities regulation.

Below, you'll find information on common forms of securities fraud and how to protect your assets.

Federal Securities Fraud Explained

Securities are negotiable financial instruments that have a financial value. People use securities to raise money in both private and public markets. Examples of securities include stocks, bank notes, and investment contracts. While there are many types of securities, they generally fall into three categories:

  • Equity: This provides ownership interests to the security's owner
  • Debt: These are typically loans that the debtor pays back to a creditor over time
  • Hybrids: These securities combine aspects of equity and debt

The prohibition against securities fraud is codified at 18 U.S.C. Section 1348. In general, it prohibits knowingly defrauding someone concerning the sale of securities. It also references The Securities Exchange Act of 1934, one of several federal laws that impose criminal penalties in security fraud cases. Another applicable federal law is the Securities Act of 1933.

The federal government enacted these laws during the Great Depression. These Acts require entities engaging in the sale of securities to provide certain information to buyers. For example, an issuer must provide information about the company, the securities offered, and certain financial information.

The Securities and Exchange Commission

The Securities and Exchange Commission (SEC) regulates securities transactions and enforces securities laws. Its stated goals are as follows:

  • Protect investors
  • Maintain fair, orderly, and efficient markets
  • Facilitate capital formation

If the SEC finds that a company violated securities law, it may transfer the securities fraud case to the Department of Justice (DOJ). The DOJ may then bring securities fraud charges against the company. Examples of fraud offenses include the following:

These types of fraud are relatively common federal crimes. High-profile cases such as the Bernie Madoff criminal case made national headlines. Madoff was convicted of running a Ponzi scheme totaling approximately $65 billion. His scheme earned him a 150-year prison sentence in federal prison.

The remainder of this article discusses different types of securities fraud.

Securities Fraud by the Company Itself

A corporate officer or director commits securities fraud if they make inaccurate disclosures about the company's financial information to its shareholders. It may also occur if they misrepresent a material fact about the company's finances.

Inaccuracies can artificially raise the company's stock's worth. It also may encourage investors to buy an unhealthy company's shares. If the company subsequently goes bankrupt, the people who bought shares based on false information lose their investment entirely. The Securities Exchange Act of 1934 imposes liability regardless of intentional or accidental inaccuracy.

One famous example of this type of securities fraud was the Enron scandal. Corporate officers failed to report the company's expenses and hid losses through creative accounting. This caused profits to appear larger than they were in reality. Numerous Enron executives were charged with insider trading, securities fraud, and other fraud crimes.

Insider Trading

Insider trading is another type of securities fraud. It occurs when someone has confidential information about a company's financial state. They then use that inside information to decide whether to buy or sell the stock before the public can access it.

For example, suppose a corporate accountant notices the company is losing money and headed toward bankruptcy. If the accountant places an order to sell his stock before notifying the company's board of directors, they are arguably guilty of insider trading.

Third Party Misrepresentation

Another type of securities fraud occurs when a third party gives false information about the stock market or a particular company or industry.

Pump-and-dump schemes are a prevalent type of third-party misrepresentation. In a pump-and-dump scheme, a person will find a small, unknown company with cheap stock and buy many of its shares. The perpetrator then sends out false information about the company. They hope this will encourage others to buy the stock and drive up its price. Once the stock price is high enough, the perpetrator sells their shares for a profit.

Protect Yourself

Federal and state governments do their best to combat securities fraud, but it's still a good idea to take steps to protect your assets. With all the information about financial markets and the vast number of players in the stock market, it's often hard to separate truth from fiction.

There are, however, some things you can do to help. Learn some of the warning signs of securities fraud so you can catch it early and minimize the damage. If you own stock, ensure you get your information directly from the company. Also, consider double-checking that information against the SEC's database.

Charged With Securities Fraud? Contact an Attorney

If you're facing criminal charges for securities fraud, there may be a chance for you to mount a strong defense against the charges. However, the key to success is having a strong criminal defense attorney experienced in white-collar crimes such as insider trading or other forms of securities fraud in your corner. Contact an experienced criminal defense attorney to discuss your case and learn about your options.

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