Legal Term Tuesday: Securities Fraud

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Legal Term Tuesday: Securities Fraud

Legal Term Tuesday: Securities Fraud

Justin Lavelle
February 2, 2016

This is the latest entry in BeenVerified’s legal term library designed to help you better understand public record information, criminal records and related terminology. The information in this article is provided for informational purposes only and does not constitute legal advice.

Securities fraud is an umbrella term that encompasses a number of financial crimes. Read on to learn the details of the specific crimes and consequences.

Securities fraud encompasses any type of deceptive practice related to the buying or selling of investments using false information and in violation of securities laws. Securities fraud includes insider trading, Ponzi schemes, boiler room operations, and accounting fraud according to Wikipedia.

Typically investigated by the National Association of Securities Dealers (NASD), securities fraud can carry with it both criminal and civil penalties, according to Investopedia. Both corporations and individuals can be held responsible for securities fraud depending on the particulars of the case.

Insider trading involves trading securities with privileged information. A hypothetical example of insider trading could be a pharmaceutical company employee buying stock before the results of the company’s successful drug trial being made public to the market. Insider trading can snag anyone from a corporate executive, a hedge fund manager or an individual who happens to get wind of such privileged information and uses it to make a personal profit, according to FindLaw.

A Ponzi scheme is a fraudulent investing scam with the promise of high returns and little risk. The investment scheme is actually non-existent and early investors have their investments returned via new money from later investors, according to Investopedia. The most notable Ponzi scheme in American history was led by Bernie Madoff, who fleeced his investors out of an estimated $20 billion, according to CNNMoney.

Other examples of securities fraud can be grouped in “boiler room” type schemes. A boiler room refers to the operations of a broker cold that entices unwitting investors into “pump and dump” schemes of penny stocks. This involves the promotion (pump) of a basically worthless stock (which the broker already owns) to drive up its value and then is sold rapidly (dump) for a profit, with its customers on the losing side of the trade. All the while, the broker charges commissions to those same clients. Jordan Belfort, AKA the Wolf of Wall Street, became notorious for such schemes.

Accounting fraud is yet another type of securities fraud, typically impacting companies and its leadership. Enron, World Com and Tyco International have all faced such accounting charges, according to Wikipedia.

Penalties for securities fraud can include the loss of professional licenses, a ban from working in the financial industry and potentially misdemeanor and even felony charges. Industry web sites such as FINRA investigate and maintain records of securities fraudsters. Misdemeanors and felonies will also remain on an individual’s criminal history.

Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.