Securities fraud is a crime in which laws set to protect investors and
securities traders are violated. Perpetrators of securities fraud may include
stockbrokers, analysts, brokerage firms, corporations, investment banks, and
private investors. For example, an analyst at a brokerage firm may give a stock
a favorable rating in order to secure the company's investment banking
business, despite knowing that the stock is not a smart buy for investors. In
another example, a private investor may commit securities fraud by acting on
Securities fraud is a serious offense that can carry both civil and criminal
punishments. Criminal investigations can lead to imprisonment; in fact, the
government has expressed a strong interest in increasing the length of
sentences for securities fraud to ten years. In addition, the Securities and
Exchange Commission (SEC) and National Association of Securities Dealers (NASD)
may investigate and impose civil fines against corporations or individuals
suspected of securities fraud. The SEC acts to regulate against securities
fraud by enforcing investment acts and laws..
Who Can Commit Securities Fraud?
Individuals and businesses can commit securities fraud. Lawyers can
represent the party or parties who have been charged with securities fraud.
- Brokers-dealers (misleading
clients or advising based on inside information)
- Financial advisors or
analysts (purposefully offering poor advice or inside information)
- Corporations (hiding or
- Private investors (acting on
Types of Securities Fraud
The most common forms of securities fraud that the SEC regulates against
- Insider trading (trading
based on information that is not available to the public)
- Accounting fraud (keeping inaccurate
books or presenting false information purposefully)
- Misrepresentation (presenting
misleading or untrue information about a company, or its securities, to an
investor or the public)
Shareholder fraud occurs when a company conceals its debts or beefs up its
earnings reports in order to mislead investors and stockholders. Shareholder
fraud can cost people their retirement funds or life savings. A few prominent
examples of companies that have been accused of shareholder fraud include:
Enron, Tyco, WorldCom, and Adelphia.
Investment and brokerage houses commit fraud when they offer false or
deceptive information to their investors in an effort to manipulate the market.
The SEC has set business standards for broker-dealers to follow in order to
advise investors well, and handle the flow of inside information fairly.