Securities Fraud

What is a 'Securities Fraud'

Securities fraud is a type of serious white-collar crime that can be committed in a variety of forms, but primarily involves misrepresenting information investors use to make decisions.

The perpetrator of the fraud can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank. Independent individuals might also commit this type of fraud through schemes such as insider trading.

BREAKING DOWN 'Securities Fraud'

The Federal Bureau of Investigation (FBI) describes securities fraud as criminal action that can include high yield investment fraud, Ponzi schemes, pyramid schemes, advanced fee Schemes, foreign currency fraud, broker embezzlement, hedge fund related fraud, and late day trading. In many cases, the fraudster seeks to dupe investors through misrepresentation and to manipulate financial markets in some way. This crime includes providing false information, withholding key information, offering bad advice, and offering or acting on inside information.

Securities Fraud Takes on Many Forms

There is no shortage of methods used to trick investors with false information. High yield investment fraud, for example, may come with guarantees of high rates of return while claiming there is little to no risk. The investments themselves may be in commodities, securities, real estate, and other categories. Advance fee schemes can follow a more subtle strategy, where the fraudster convinces their targets to advance them small amounts of money that is promised to result in greater returns. Sometimes the money is requested to cover processing fees and taxes in order for the funds that allegedly await to be disbursed. Ponzi and pyramid schemes typically draw upon the funds furnished by new investors to pay the returns that were promised to prior investors caught up in the arrangement. Such schemes require the fraudsters to continuously recruit more and more victims to maintain the sham for as long as possible.

The FBI warns that security fraud is often noted by unsolicited offers and high-pressure sales tactics on the part of the fraudster, along with demands for personal information such as credit card information and social security numbers. Allegations of securities fraud are investigated by the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD). The crime can carry both criminal and civil penalties, resulting in imprisonment and fines. Some common types of securities fraud include manipulating stock prices, lying on SEC filings, and committing accounting fraud. Some famous examples of securities fraud are the Enron, Tyco, Adelphia and WorldCom scandals.