Securities Fraud: How


Securities Fraud: How It Happens and What You Can Do

Securities fraud. It’s a term that strikes fear into the hearts of investors everywhere. But what exactly is it, and how can you protect yourself from becoming a victim? This article will break it all down for you in plain English.

What is Securities Fraud?

Securities fraud refers to deceptive practices in connection with the buying and selling of investment vehicles like stocks, bonds, and other securities. It involves purposely providing false or misleading information to investors. The goal is usually to convince investors to buy or sell securities at artificially inflated or deflated prices.

Some common examples of securities fraud include:

  • Insider trading – Company insiders use non-public information to make investment decisions.
  • Accounting fraud – Company executives falsify financial statements and reports.
  • Pump-and-dump schemes – Promoters hype up a stock price before selling their shares.
  • Churning – Brokers make excessive trades in an account to generate commissions.

As you can see, securities fraud erodes trust in capital markets. It cheats hardworking investors out of their money. That’s why both federal and state laws prohibit it.

Federal Securities Fraud Laws

Several federal statutes specifically target securities fraud. The main laws are:

Securities Exchange Act of 1934

This law established the Securities and Exchange Commission (SEC). It gives the SEC broad powers to regulate securities markets and enforce securities laws. The Act also requires public companies to register with the SEC and file regular financial reports. This increases transparency for investors.

Sections of the Act dealing with securities fraud include:

  • Section 10(b) – Prohibits using manipulative or deceptive devices in securities transactions.
  • Rule 10b-5 – Creates liability for making false or misleading statements related to securities trading.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act was passed after the Enron and WorldCom accounting scandals. It aims to protect investors by improving the accuracy of corporate financial reporting. Important provisions include:

  • Increased accountability for senior executives
  • Stricter auditing and financial reporting requirements
  • New rules regarding conflicts of interest

Violating Sarbanes-Oxley can result in both civil and criminal liability.

Dodd-Frank Wall Street Reform Act

The Dodd-Frank Act was passed in 2010 following the 2008 financial crisis. It enacted major changes to financial regulation in the United States. For securities fraud, important elements include:

  • Increased whistleblower rewards and protections
  • New rules requiring brokers to act in customers’ best interests
  • Stricter regulation of credit rating agencies

Dodd-Frank gave the SEC further tools to pursue securities fraud cases. It also established the Consumer Financial Protection Bureau to help protect investors.

State Securities Fraud Laws

In addition to federal laws, each state has its own statutes prohibiting securities fraud. These are often referred to as “Blue Sky Laws.” Most state laws are modeled after the Uniform Securities Act. They make it illegal to:

  • Employ schemes to defraud investors
  • Obtain money through misstatements or omissions of material facts
  • Engage in fraudulent securities transactions

State securities regulators can order violators to pay restitution to harmed investors. They can also impose fines and other administrative sanctions.

Securities Fraud Defenses

If accused of securities fraud, having a good defense is critical. Here are some common defenses:

Lack of Scienter

For most securities fraud charges, the prosecution must prove you acted with scienter. This means intentionally committing fraud or being extremely reckless. If you can show your actions were just negligent or foolish – not fraudulent – you may avoid liability.

Reliance on Professionals

You may have a defense if you reasonably relied on advice from lawyers, accountants, or other professionals. Their bad advice could negate any intent to defraud. But their advice should be documented.

Statute of Limitations

Securities fraud charges must be brought within a certain time limit. For federal claims under Section 10(b), the statute of limitations is 5 years. State laws vary but are often 2-3 years. If too much time has passed, the charges may be dismissed.

How to Protect Yourself

While securities fraud can never be fully prevented, there are steps investors can take to minimize risk:

  • Conduct research – Don’t invest in companies you don’t understand. Research their filings, management, and business model.
  • Diversify – Don’t put all your eggs in one basket. Diversification reduces the impact of any single fraud.
  • Watch for red flags – Things like consistently high returns, frequent changes in auditors, and too-good-to-be-true performance may indicate problems.
  • Read the fine print – Don’t get swayed by hype. Carefully read prospectuses and financial reports before investing.
  • Monitor account statements – Routinely review your account statements for any suspicious activity.

Following these tips can help you spot potential fraud and make wise investment choices. But if you do suffer losses from securities fraud, it’s important to explore your legal options. An experienced securities fraud attorney can assess if you have a valid claim for recovery.

The Bottom Line

Securities fraud is a complex issue that impacts countless investors each year. But arming yourself with knowledge of the common schemes and laws can help avoid becoming a victim. Through smart investing, due diligence, and working with qualified legal counsel, investors can help curb securities fraud and protect their hard-earned money.