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Securities fraud refers to activities that persuade investors to buy stocks through manipulation and inaccurate facts. These purchases, which are referred to as stock or investment fraud, typically result in the buyer losing money.
Stock fraud is committed through many ways, which range from publishing misinformation to altering financial statements to engaging in stockbroker embezzlement. To combat these deceptive investment practices, the Securities and Exchange Commission (SEC) is aggressively enforcing the provisions of the Frank-Dodd Act and other applicable securities laws.
A History of Fraud
During the 1990’s, the continuing success of the American stock market drove periods of economic prosperity. Many citizens became involved in the stock market through investments made through their retirement accounts.
Fraudulent securities practices resulted in the financial bubble bursting, which resulted in many older Americans losing their savings and retirement funds. Companies such as Enron became household names associated with corporate corruption and financial mismanagement.
In order for the stock market to operate as intended, legislation was put in place to protect investors. This means that full financial disclosures concerning corporate operations and transactions must be openly shared with investors and businesses. When companies now violate federal laws and state regulations related to investing, consumers are empowered to file securities lawsuits. The Securities and Exchange Commission (SEC) is the federal agency that enforces investment regulations.
Types of Fraud
There are many types of fraudulent securities investments. First, corporate fraud refers to how executives embezzle and misrepresented company funds. The Enron scandal and the 2008 subprime mortgage crisis are two examples of corporate fraud. Second, Internet fraud means that criminals share false information through online channels in order to increase prices, sell their own stock and make more money. Third, insider trading is when dishonest individuals share access to information regarding a certain company that is not publicly available.
Fourth, accountant fraud is when financial professionals intentionally red flag inaccurate financial reports. Fifth, Ponzi Schemes refers to investment funds that are surreptitiously withdrawn from recent investors instead of the investment profits. Short selling abuses occur when stock sellers distribute inaccurate information on stocks with the purpose of driving down prices.
Applicable Regulations
Securities, such as stocks, bonds and mutual funds, share similar characteristics because they are all created with the expectation of returning profits. All of these transactions are controlled by a comprehensive system of federal laws and regulations. The Securities Act of 1933 addresses how companies issue securities and the Securities Exchange Act of 1934 regulates the selling, trading and purchasing of securities. Both of these laws specifically authorize the Securities and Exchange Commission to issue additional regulatory controls and oversight practices.
The Sarbanes-Oxley Act of 2002 and the Private Securities Litigation Reform Act have enhanced investment reporting and disclosure practices. The purpose of all of these federal statutes is to set standards regarding fair dealings, honest exchanges and truthful communications. Almost all states have their own securities laws that are enforced by the state’s securities commissions that enforce rules, conduct investigations and legally prosecute fraudulent investment practices.
Securities practices and regulations involve invasive laws and industry standards that protect consumers and companies. The FBI offers these helpful tips to prevent securities fraud.