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Securities Fraud


 Securities fraud is the act of lying or sharing insider information about a company or its stock value to influence other people's investment decisions. While this may seem straightforward, the actual practice of prosecuting or defending a person who is charged with securities fraud is complex.  Securities fraud charges cover a wide range of acts that a person can commit and often coincide with an SEC civil action or investigation.

Securities fraud, according to the FBI, includes a broad range of activities, including but not limited to high yield investment fraud, Ponzi and pyramid schemes, broker embezzlement, and advance fee schemes. Securities fraud is characterized by the misrepresentation of material information to investors in connection with the sale or purchase of securities and/or the manipulation of financial markets. A “security” includes, but is not limited to, a “note, stock, treasury stock, security future, security-based swap, bond, debenture… option… [or] certificate of deposit.” Additionally, insider trading, falsifying information in corporate filings, lying to corporate auditors and manipulating share prices also fall within the ambit of securities fraud.

Below are a few common examples of securities fraud:

Ponzi Schemes

A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.   Ponzi scheme organizers often promise high returns with little or no risk. Instead, they use money from new investors to pay earlier investors and may steal some of the money for themselves.  With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Market Manipulation

Market manipulation occurs when an officer or director of a corporation does not accurately report the business's financial information to its shareholders. This inaccurate report can artificially raise the value of the company's stock and may urge investors to buy shares of an ailing company. If the company then goes bankrupt, the people who bought shares based on false information lose their entire investment.

“Pump And Dump” Schemes

“Pump and dump” schemes are a prevalent type of third-party misrepresentation that occur when a third-party gives out false information about the stock market, a company or an industry.  In a “pump and dump” scheme, a person will find an unknown company with affordable stock and buy many shares. That person will then send out false information about the company to encourage others to buy the stock, which then drives up the price. Once the price of the stock is high enough, the person sells, or dumps, their shares for a profit, devaluing the stock.

Insider Trading

Insider trading is a type of securities fraud that involves the trading of a corporation's securities (stocks, bonds or stock options) by corporate insiders such as officers, key employees, directors or holders of more than 10 percent of the firm's shares. Insider trading is illegal when an insider buys or sells a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Examples of insider trading include:

  • Corporate officers, directors and employees who trade the corporation's securities after learning of significant, confidential corporate developments
  • Friends, business associates and family members of corporate insiders who trade securities after receiving information
  • Employees of law, banking and brokerage firms who have secret insider information about a corporation, who then trade securities after receiving confidential information
  • Government employees who learn insider information because of their job

The criminal penalties for all forms of securities fraud are severe. Call us at 561-932-1690 to schedule your free consultation.

Civil Prosecutions for Securities Fraud

Securities fraud can be prosecuted as both a criminal and/or civil case.  When prosecuted as a civil case, the SEC often serves as the plaintiff and will file a complaint asking for sanctions or remedies against the defendant in U.S. District Court.

The SEC has legal authority to compel production of records and other disclosures, obtain an injunction against the defendant to stop any actions that led to violations of the law, and seek the return of illegally obtained profits and/or monetary penalties.  SEC enforcement is civil and can result only in civil penalties - therefore, a penalty of imprisonment can not be imposed in securities fraud cases prosecuted by the SEC.

However, the SEC can refer any alleged violation of securities laws over to the Department of Justice for criminal prosecution which can include a sentence of imprisonment.

The main difference between civil and criminal prosecutions of securities fraud cases is that the SEC (civil) prosecutes negligent violations of securities laws, whereas the DOJ (criminal) prosecutes willful violations of those laws.

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