How to Report Securities Fraud

Securities fraud is one of the most insidious crimes. It is as much a defrauding of the economy itself as it is specific individuals. Manipulating the stock or commodities market is defined as a felony by the federal government and most state governments. Federal authorities say that only a handful of the instances of fraud that happen each year are prosecuted. Even less are successfully prosecuted. 

Whistleblowers can help the authorities find and prosecute cases of securities fraud. The Securities and Exchange Commission encourages private individuals working in the business community to come forward and report instances of securities fraud. There are many types of securities fraud, aside from outright manipulation of different markets, but the most common are:

  • deliberate falsification of information reported to the SEC
  • breach of fiduciary duty to shareholders arising from corporate mismanagement
  • fraudulent accounting
  • illegal insider trading
  • backdating or otherwise falsifying stock options information
  • Ponzi schemes
  • knowingly aiding and abetting securities fraud

Notable laws dealing with securities fraud include the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. The False Claims Act, adopted and signed by President Lincoln during the Civil War, enables whistleblowers to come forward with the incentive of being entitled to any awarded damages. Another notable law is the Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act, which introduced major reform of the securities regulatory structure. 

How to Report an Instance of Fraud

Securities fraud can be reported in many ways. The fraud can be reported directly to the Securities and Exchange Commission. The easiest way to do this is to go to the SEC's website and fill out the questionnaire. Another way to report securities fraud is to file a "qui tam" case against the fraud's perpetrators. 

Qui tam is short for the Latin phrase "qui tam pro domino rege quam pro seipse", which means "he who sues for the king as for himself." This type of case is filed by a private individual working with a private law firm. The difference is that a qui tam case is also filed on behalf of the government. The whistleblower believes that there is an instance of securities fraud occurring, and he can file a qui tam lawsuit against the alleged perpetrators to bring the government into the process. The government can decline to become involved, in which case the whistleblower can proceed with the case himself. 

Famous Qui Tam Securities Case

Michael R. Lissack, an investment banker who worked at Salomon Smith Barney in the 1990s, filed a qui tam lawsuit against more than 22 Wall Street firms. The suit alleged that these investment banks had engaged in "yield burning": Systematically overpricing hundreds of securities above their true market value and pocketing the results. Hundreds of millions of dollars in illegal profits had been pocketed. With one lawsuit, Lissack forever changed how the municipal bond market worked. He was awarded $26 million for his efforts.