Securities Fraud vs Civil Fraud: Key Differences

Securities Fraud vs Civil Fraud: Key Differences

Securities fraud and civil fraud—they sound pretty similar, right? But while they’re both types of fraud, they’re actually quite different. Knowing the distinctions is important, especially if you’re an investor or run a business.

In this article, we’ll break down the key differences between securities fraud and civil fraud. We’ll look at what defines each type of fraud, what laws apply, who can be charged, what the penalties are, and more. We’ll also give some real-world examples to help illustrate the differences.

What is Securities Fraud?

First, let’s start with securities fraud. This refers to deceptive practices relating to the buying and selling of securities—stocks, bonds, options, etc. There’s a few main types of securities fraud:

• Insider trading – When someone uses non-public info to make trades
• Accounting fraud – Falsifying financial records and statements
• Pump-and-dump schemes – Artificially inflating a stock’s price through false info
• Churning – Excessive trading by a broker to generate commissions
• Misrepresentations – Lying about company performance to investors

The main laws governing securities fraud are the Securities Act of 1933 and the Securities Exchange Act of 1934. These require full and accurate disclosure in the buying and selling of securities. Violating them can mean big fines and even jail time.

What is Civil Fraud?

Civil fraud is a bit broader—it refers to intentionally deceiving someone for financial gain or to cause damage. Some examples are:

• Lying on a loan application
• Embezzlement
• Forgery
• False advertising
• Breach of contract

Civil fraud can violate statutes like the Federal Trade Commission (FTC) Act which prohibits “unfair or deceptive acts or practices.” But often there is no specific statute—it simply violates standards of ethics and good faith.

Key Differences

While securities fraud and civil fraud both involve deception, there’s some important ways they differ:

1. Area of law

Securities fraud specifically relates to securities law. Civil fraud can cover many areas like consumer protection, employment, and contract law. The applicable laws and standards of proof vary.

2. Scope

Securities fraud only applies to misconduct in the buying/selling of securities. Civil fraud is broader and can apply to many types of deceitful business conduct.

3. Who can be charged

For securities fraud, individuals as well as entire companies can be charged. Civil fraud charges are usually against individuals or businesses directly involved in a transaction.

4. Burden of proof

To prove securities fraud, the SEC or prosecutors must meet a high standard of “beyond a reasonable doubt.” For civil fraud, the standard is lower—a “preponderance of evidence.”

5. Penalties

Securities fraud penalties can include huge fines and years in prison. Maximum civil penalties are lower, and jail time is rare.

6. Government involvement

Securities fraud cases typically involve the SEC, DOJ, or state prosecutors. Civil fraud cases are often private lawsuits between two parties, without government prosecution.

Examples

Some real-world examples help highlight the differences:

Securities Fraud

• In the early 2000s, Enron executives falsified financial statements to hide billions in debt and losses. This accounting fraud misled investors and inflated the stock price. The DOJ prosecuted and won convictions for securities fraud, wire fraud, and other charges.
• In the 1980s, financier Ivan Boesky paid off an insider to get confidential info on corporate takeovers. Boesky used this insider info to trade stocks and make huge profits. He pled guilty to securities fraud and served 2 years in prison.

Civil Fraud

• A car dealer lies about prior damage to a used vehicle to convince a customer to buy it. The customer later sues for civil fraud over the deceptive sales tactics.
• An employee embezzles $50,000 from their company over several years. The company sues the employee for civil fraud to recover the stolen money.

As you can see, securities fraud relates to misconduct in securities markets while civil fraud covers deception in business dealings and transactions.

How to Report Suspected Fraud

If you believe you’ve been the victim of fraud, it’s important to speak up:

• For securities fraud, you can submit a tip to the SEC or contact a securities lawyer.
• For civil fraud, notify local law enforcement and consult with a civil attorney about your options.
• You can also file complaints with organizations like the FTC, state attorneys general, or the Better Business Bureau.

The sooner you report suspected fraud, the better, so authorities can investigate and hold violators accountable. And reporting fraud can help prevent other innocent people from being victimized.

The Bottom Line

Securities fraud and civil fraud both involve deceit for unlawful gain. But securities fraud specifically relates to securities trading and disclosure laws, while civil fraud covers a broader range of misconduct in business and consumer transactions. Understanding the key differences helps investors, companies, and consumers identify fraudulent acts and seek appropriate remedies.

At the end of the day, all fraud is unethical and illegal. Being able to spot the warning signs can help protect your money and your rights. If you encounter fraud, make sure to report it promptly so violators face consequences. Together we can reduce fraud and make the marketplace more transparent and fair for everyone.