What Is Securities Fraud?

Securities Fraud is any act of persuading investors to buy stocks based on inaccurate facts. It is also referred to as stock or investment fraud. These purchases often result in monetary loss for the buyer. Securities fraud can be committed a variety of ways, including printing untrue information on a company's financial statement or SEC filings, insider trading, falsifying information in dealings with corporate auditors, stock manipulation schemes, and stockbroker embezzlement. Due to the Frank-Dodd Act, the qui tam provision now applies to securities fraud in cases where the defendant is under the jurisdiction of the Securities and Exchange Commission (SEC). 

Securities Fraud is incredibly prevalent in the US today. It is estimated by securities regulators that the sum of profit through civil securities fraud is up to $40 billion annually. While all investors have the potential to become victims, most often the victims are people older than 50, either directly buying securities or indirectly connected through a pension. Between 2006 and 2007, the amount of class action securities fraud lawsuits nearly doubled due to the nationwide crisis of the backdating scandal in 2006 and the beginning of the subprime crisis in 2007. Securities fraud has become increasingly abstruse as the financial industry introduces more elaborate modes of investment. 

Types of Securities Fraud

Corporate Fraud - The poster child for this type of securities fraud is Enron. Enron's upper level executives embezzled excessively and repeatedly misrepresented the companies funds. This type of fraud drastically increased due to the 2008 subprime mortgage crisis.

Internet Fraud - This involves criminals spreading false information through various channels on the internet (i.e. forums, spam emailing, chat rooms, and internet boards) to increase the price on either seldom traded stock or the stocks of shell companies. Then the instigators of the swell in purchasing sell all of their own stock once the price has met their standards. They walk away having made a huge profit, while the victims are now left with stock that has settled at its usual low price, substantially lower than the price it was purchased at. 

Insider Trading - This involves individuals that hold more than ten percent of a particular company's stock or other individuals that have access to non-public information regarding a certain company. There are various legal ways for a person with this knowledge to trade stock legally, as long as the non-public information does not influence the trade in any way. If a person with non-public information uses that knowledge to trade to their advantage, or convinces anyone else to trade stock based on that knowledge, it is considered a fraudulent offense.

Accountant Fraud - A burst of accounting fraud rippled through the US in 2002. This type of fraud is committed by an accountant who neglects to point out and halt the release of inaccurate financial reports, written by a corporate client, which misrepresents the financial stability and position of the company in question. In 2002 several major public accounting firms were charged with this type of fraud, leading to damages owed in the billions.

Mutual Fund Fraud - In 2003 a number of big time mutual fund firms and brokerages were alleged to have used to trick customers to their disadvantage. Some of the methods included market timing and late trading.

Short Selling Abuses - Short selling, when abused, can cause a decrease in stock prices. Unscrupulous naked short selling involves a buyer who sells the stock before borrowing and, in truth, without even planning to borrow. Distributing inaccurate information on stocks with the purpose of driving down prices is named "short and distort."

Ponzi Schemes - This is an investment fund from which withdrawals are taken from the most recent investors, rather than money made through the investment itself. Bernie Madoff organized the largest Ponzi scheme in history, resulting $64.8 billion of losses.