How to Prevent Employee Misconduct from Leading to Securities Fraud Charges

How to Prevent Employee Misconduct from Leading to Securities Fraud Charges

Securities fraud is a serious issue that can lead to major legal consequences for companies and employees. While there are laws in place to punish those who commit securities fraud, it is better for companies to prevent misconduct in the first place. Here are some tips on how to prevent employee misconduct from leading to securities fraud charges.

Understand What Constitutes Securities Fraud

The first step is to understand exactly what types of behaviors can be considered securities fraud. This includes 1:

  • Insider trading – Using non-public information to trade securities
  • Accounting fraud – Falsifying financial records and statements
  • Bribery – Bribing officials to win business or get favorable treatment
  • Manipulation – Artificially affecting the supply or demand for a security
  • Churning – Excessive trading to generate commissions
  • Misrepresentations – Lying to investors about company performance

Employees may engage in these behaviors intentionally for personal gain or unintentionally due to negligence or misunderstanding. Companies need to be aware of all the types of misconduct that can lead to securities fraud charges.

Set Clear Policies and Procedures

Once the scope of potential misconduct is understood, companies need to set clear policies prohibiting these behaviors 2.

  These policies should be easy to understand and cover:

  • Who has access to confidential information and when they can trade securities
  • Strict accounting and auditing procedures
  • Rules for interacting with government officials and customers
  • Expectations for communications about the company and performance
  • Guidelines for trading activities and investment recommendations

Employees should receive training on these policies and procedures, as well as updates whenever changes are made. Comprehensive policies set the foundation for preventing misconduct.

Encourage a Culture of Ethics and Compliance

In addition to formal policies, companies need to cultivate an ethical workplace culture 3. 

Senior leaders need to regularly communicate that ethics and compliance are top priorities. Those who engage in misconduct should be disciplined, while those who demonstrate integrity should be rewarded.Companies can encourage ethical behavior through:

  • Values-based hiring and onboarding
  • Ongoing ethics training
  • Maintaining open channels for reporting concerns
  • Incentives for meeting compliance goals
  • Celebrating integrity through company awards

When employees feel empowered and rewarded for doing the right thing, they are less likely to cut corners.

Implement Controls and Oversight Processes

Policies and culture provide a foundation, but companies also need strong controls to prevent opportunities for misconduct 4.

 Some important controls include:

  • Trading blackout periods and preclearance requirements
  • Strict separation of duties
  • Transaction monitoring and activity reviews
  • Surprise audits
  • Job rotation and mandatory vacation
  • Independent whistleblower hotlines

Ongoing monitoring and auditing are essential for ensuring policies are followed. Controls should aim to eliminate temptations and excuses for misconduct.

Perform Thorough Investigations

If misconduct is suspected, companies need to respond swiftly with thorough investigations 5. 

Employees need to know that reports will be taken seriously and handled properly.Investigations should:

  • Gather all available information to recreate timeline
  • Interview all involved personnel
  • Review communications and documents
  • Consult compliance, legal, and HR as needed
  • Document findings and recommended actions

Proper investigations reinforce that misconduct will not be tolerated. They also provide learnings to improve policies and controls.

Enforce Consequences Consistently

The final critical step is following through with consequences when misconduct is identified 1. 

Penalties should be clearly defined in policies and then applied consistently, regardless of the violator’s position.Typical consequences include:

  • Termination for serious offenses
  • Bonus reductions for compliance violations
  • Mandatory training for minor issues
  • Notation in employee files
  • Clawbacks of ill-gotten gains

Seeing that no one is above the rules motivates employees to comply and deters future misconduct.

Partner with Legal Counsel

Navigating securities regulations can be complex, so companies should work closely with legal counsel when establishing fraud prevention programs 2. 

Counsel can provide guidance on setting policies, facilitating investigations, and pursuing disciplinary actions.Experienced securities attorneys can also advise on:

  • Reporting obligations and cooperation credit
  • Potential criminal vs civil charges
  • Litigation risks and defense strategies
  • Settlement negotiations and agreements
  • Implementing corrective measures

Partnering with counsel helps ensure compliance programs are legally sound.

Conduct Ongoing Assessments

As business evolves, so do the risks for misconduct. Companies need to periodically assess their policies, training, and controls to identify potential gaps or improvements 3.

Important activities include:

  • Employee surveys on company culture
  • Analysis of industry enforcement trends
  • Audits of policy awareness and procedure compliance
  • Tracking whistleblower reports and investigation results
  • Benchmarking against peers and regulations

Updating programs to address emerging risks is key for prevention.


Securities fraud charges can damage company finances and reputation. While misconduct cannot be completely eliminated, the right prevention strategies can reduce risk. Developing clear policies, encouraging an ethical culture, implementing strong controls, thoroughly investigating issues, and enforcing consistent discipline are all important elements. Companies that take a proactive approach to prevention are better positioned to avoid significant legal liabilities in today’s highly regulated business environment. The costs of prevention pale in comparison to the potential consequences.



 U.S. Securities and Exchange Commission. “SEC Enforcement Actions: Addressing Misconduct that Led to or Arose from the Financial Crisis.”


 Kaplan, S. and Murphy, K. “Managerial incentives and the problem of risk.” Journal of Accounting and Economics, 29(1), (2000): 57-114.


 Arjoon, S. “Corporate Governance: An Ethical Perspective.” Journal of Business Ethics, 61(4), (2005): 343-352.


 COSO. “Fraud Risk Management Guide.”


 Wells, J. “Corporate fraud handbook: Prevention and detection.” John Wiley & Sons, 2017.