Securities Fraud Law



Securities fraud, also known as “stock fraud” or “investment fraud,” is a deceptive practice related to the stock or commodities markets and designed to induce investors to buy or sell on the basis of false information. This often results in financial losses and is a violation of securities laws. Securities fraud can include theft from investors (embezzlement by stockbrokers), insider trading, stock manipulation, misstatements on a company's financial reports, or lying to corporate auditors.

Generally, the Securities and Exchange commission polices acts of securities fraud. However, it is often criticized for being more a reactionary body than one that actively prevents misconduct. For example, securities fraud by high level corporate officials became a subject of wide national attention during the early 2000's, when scandals such as Enron/Arthur Andersen and Worldcom brought attention to these legal issues. Similar issues were feared during the economic downturn and the sub-prime lending scandals, and found in the Ponzi schemes of Bernie Madoff.

Of course, part of the problem is the myriad form that securities fraud can take:

Dummy Corporation Schemes

Dummy corporation schemes allow fraudsters to create the illusion of being an existing corporation with a similar name to a real entity. The fraudsters then sell securities in the dummy corporation by misleading the investor into thinking that they are buying shares in the real corporation.

Internet Fraud

Internet fraudsters often use so-called “pump-and-dump” schemes, in which false information is pumped into the internet via chat rooms, emails, etc.,in order to artificially inflate stock prices.. When the price reaches a certain level, the fraudster dumps their stock holdings to obtain the resulting profits before the other buyers realize the scheme and prices drop to their normal prices.

Insider Trading

There are two types of insider trading: trading of stock by corporate insiders who own certain substantial percentages of a corporation and trading stocks based on non-public, insider information about the company. While the first type is generally legal, provided certain regulatory requirements are met, the second is generally illegal given the distinct advantage it gives the insider over others in the market.

There are many other forms of securities fraud, such as microcap fraud, boiler rooms, Ponzi schemes, and “short and distort” practices. Unfortunately, as markets change, so too will the ways to commit securities fraud, meaning that despite heavy regulation the axiom of “buyer beware” must always apply to these kinds of transactions.

For more information about securities fraud, please visit the resources listed below. Additionally, if you need the assistance or guidance of an attorney experienced in securities fraud matters, please visit the “Law Firms” tab on the menu bar at the top of this page.

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Securities Fraud Law - US

  • CFTC - Division of Enforcement - Consumer Protection

    The CFTC's Division of Enforcement investigates and prosecutes alleged violations of the Commodity Exchange Act and Commission regulations. The Commission relies on the public as an important source of information in carrying out its regulatory and enforcement responsibilities. You may contact us to report suspicious activities or transactions which may involve the trading of commodity futures contracts or commodity options.

  • Federal Securities Law

    The Federal Securities Laws are comprised of a series of statutes, which in turn authorize a series of regulations promulgated by the government agency with general oversight responsibility for the securities industry, the Securities and Exchange Commission. The two main statutes involved in the Federal Securities laws are the The Securities Act of 1933 and the The Securities Exchange Act of 1934. Generally speaking, the '33 Act governs the issuance of securities by companies, and the '34 Act governs the trading, purchase and sale of those securities. Each has a wealth of regulations promulgated by the Securities and Exchange Commission, as well as regulations adopted by the National Association of Securities Dealers, Inc. and the various stock exchanges.

  • Financial Fraud Enforcement Task Force

    President Obama established the Financial Fraud Enforcement Task Force in November 2009 to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening. The task force is improving efforts across the government and with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, recover proceeds for victims and address financial discrimination in the lending and financial markets.

  • Insider Trading - Information

    Insider trading” refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information.

  • Private Securities Litigation Reform Act of 1995

    The United States Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C.) ("PSLRA") implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses. It was designed to reduce the number of “frivolous” securities lawsuits filed in federal courts. In essence, it says that investors cannot proceed with a case unless they already have facts in-hand that strongly suggest a deliberate fraud.

  • Sarbanes-Oxley Act

    The Sarbanes–Oxley Act of 2002 was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets.

  • Securities Act of 1933

    Congress enacted the Securities Act of 1933 (the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, or the '33 Act, 48 Stat. 74, enacted 1933-05-27, codified at 15 U.S.C. § 77a et seq.), in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression. Legislated pursuant to the interstate commerce clause of the Constitution, it requires that any offer or sale of securities using the means and instrumentalities of interstate commerce be registered pursuant to the 1933 Act, unless an exemption from registration exists under the law.

  • Securities Exchange Act of 1934 (Exchange Act) - Section 10b and Rule 10b-5

    The Exchange Act protects investors by making sure information is available, but also protects investors by prohibiting fraud and establishing severe penalties for those who defraud investors, as well as those who engage in some trading practices that take advantage of information most investors do not have. When federal securities laws are violated by market participants, the SEC can bring a civil enforcement action and can also bring criminal actions for some violations. The Exchange Act is also more generous than the Securities Act in providing investors with a right to bring a private suit against market participants who have defrauded them: * Section 10b and Rule 10b-5: These are the principal statutory weapons against fraud.

  • Securities Fraud - Definition

    Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws. Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.

Organizations Related to Securities Fraud Law

  • Commodities Futures Trading Commission

    The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

  • Financial Industry Regulatory Authority (FINRA)

    About the Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,700 brokerage firms, about 167,000 branch offices and approximately 635,000 registered securities representatives.

  • National Association of Securities Dealers Automated Quotations (NASDAQ)

    NASDAQ is an acronym standing for National Association of Securities Dealers Automated Quotations. But this automated quotation system quickly matured far beyond its original quote-service roots, evolving into what it is today—a major world stock market. Indeed, what NASDAQ "stands for" is not nearly as relevant as what The NASDAQ Stock Market has become known for, namely pioneering screen-based technology and an abundance of growth companies.

  • National Association of Stockbrokers

    In the last 22 years we have developed an exclusive list of top stockbrokers, analysts and institutional money managers. We now have approximately 20,000 members nationwide, 400 in each of the 45 chapters. Our members are most concerned about recent developments and future outlook. This face to face contact is very beneficial since they recommend stocks they know about personally. Most of our companies come back every year to keep in contact with our chapters.

  • National Futures Association - Background Affiliation Status Information Center (BASIC)

    Whether you are an investor thinking about opening a futures account or an NFA Member contemplating a new business relationship, BASIC can be a valuable resource for you. BASIC contains Commodity Futures Trading Commission (CFTC) registration and NFA membership information and futures-related regulatory and non-regulatory actions contributed by NFA, the CFTC and the U.S. futures exchanges.

  • North American Securities Administrators Association (NASAA)

    Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

  • NYSE Regulation, Inc

    NYSE Regulation Overview Leadership Board of Directors Committees Governance Investor Protection Office of the Hearing Board NYSE Regulation, Inc., is a not-for-profit corporation dedicated to strengthening market integrity and investor protection. In addition to its regulatory responsibilities to enforce marketplace rules and federal securities laws of the New York Stock Exchange, NYSE Regulation oversees NYSE Arca Regulation and NYSE Amex Regulation through regulatory services agreements.

  • SEC Center for Complaints and Enforcement Tips

    You can file a complaint or provide us with tips on potential securities law violations though the links on this page. We welcome hearing from you because your information may alert us to broker or firm misconduct, an unfair practice in the securities industry that needs to be changed, or the latest fraud.

  • Securities and Exchange Commission (SEC)

    The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.

  • Securities Fraud and Investor Protection Resource Center

    Do you think you may have been a victim of securities fraud? What are your rights as an investor and what duties does your broker owe to you? How do you know if you have been defrauded by your stockbroker or investment advisor? What can you do about it, if you have been subjected to stockbroker fraud? You will find information at this web site which will assist you in addressing these questions and others which may arise in connection with improper investments and stockbroker/customer disputes.

Publications Related to Securities Fraud Law

  • SEC News Digest

    The SEC News Digest provides daily information on recent Commission actions, including enforcement proceedings, rule filings, policy statements, and upcoming Commission meetings.

  • Securities Fraud - Articles and Publications

    Many contend that securities fraud has been a result of deregulation of the securities industry since at least the early 1980s, with an attendant relaxation of supervision by the U.S. Securities and Exchange Commission (SEC). The 1990s saw a renewed and accelerated effort by the SEC and other regulatory agencies to regulate the securities industry.

  • Securities Fraud - Business Services Industry

    US FEDERAL SECURITIES regulators recently launched an Internet fraud sweep targeting suspects who allegedly were involved in stock manipulation schemes. The Securities and Exchange Commission (SEC) took action against 33 individuals and small entities accused of funneling more than $10 million in illegal profits by means of cyber-fraud.

Articles on HG.org Related to Securities Fraud Law

  • Common Litigation Challenges for Financial Advisors
    In the securities law arena, there are more issues than just fraud, misrepresentation, breach of contract, etc. Financial advisors are sometimes involved in the following types of litigation problems and should, therefore, be familiar with the following terms: Promissory Notes, Broker Raiding, Regulatory Compliance, Solicitation, Broker Protocol and Sunset Agreements/Sale of Practice.
  • NYC Bureau of Fraud Investigation "Interviews" about Medicaid
    A letter from the NYC Bureau of Fraud Investigation means that you are the target of a fraud investigation. How you respond to the letter can mean the difference between a minor inconvenience and criminal charges. You should get advice from an experienced Medicaid lawyer before you speak to the investigator. Anything you say to the investigator can and will be used against you.
  • The Financial Advisor Expungement Process
    Financial advisors registered with FINRA each have information regarding their experience in the securities industry available on FINRA’s Broker Check. The purpose of BrokerCheck is to help investors make informed choices about brokers and brokerage firms-and to provide easy access to investment adviser information.
  • Avoiding Criminal Charges at the NYC Bureau of Fraud Investigation for Medicaid Fraud
    Every year, hundreds of New Yorkers face criminal charges because they provided false information on their Medicaid application or re-certifications. Your case does not have to end this way. In fact, most Medicaid fraud investigations are settled with no criminal charges at all. The key is how you respond to the Medicaid fraud investigators.
  • Yaz Settlement Recipients the Target of Green Dot Debit Card Scam
    Claiming to be from a settlement center, con-artists tell Yaz victims to send money to receive their settlements back.
  • Overview of Business Development Company (BDC) Investments
    A Business Development Company (“BDC”) is a form of investment company that invests in small and mid-sized businesses. Investors can buy shares in a BDC, and the money from their investments is used to fund the businesses. In turn, investors can profit from dividends paid on their investments, or, in some cases, the sale of their shares.
  • Financial Advisor Promissory Notes (Up-front Forgivable Loans)
    Promissory Notes (often called an up-front forgivable loans) are commonly used as a recruiting tool by many of the major brokerage firms in the securities industry, including Morgan Stanley, Merrill Lynch, Wells Fargo, Ameriprise and UBS Financial Services. Essentially, brokerage firms use the up-front forgivable loans to recruit financial advisors from other firms to bring their clients (or “book of business”) to the new firm.
  • Importance of Brokerage Firm Due Diligence on Alternative Investments
    “Alternative investments” generally refer to all non-traditional investments – like stocks, bonds, and mutual funds. Examples include oil and gas limited partnerships, non-traded REITs, business development companies, tenant-in-commons, and equipment leasing funds. The commonality is that alternative investments are high-risk, generally illiquid, and pays a high commission to the advisor that recommends them.
  • How To Know If Your Broker Is Churning Your Account
    Churning claims arise out of the inherent conflict of interest involved because a financial advisor is compensated by commissions earned in buying and selling securities on behalf of a client. As long as financial advisors are compensated by commissions, the unscrupulous ones will continue to attempt to enrich themselves by excessively trading accounts.
  • New Credit Card Law Pits Texas against Merchants and Financial Companies
    During the regular session, the Texas Legislature passed a law allowing merchants to ask to see a photo ID when processing a credit card or debit card transaction and to decline the transaction if the customer refuses. The law, which goes into effect January 1, may have placed the state of Texas on a collision course with merchants and financial institutions that issue credit cards, according to the Texas Tribune. The problem is that many financial institutions prohibit merchants from declining a transaction in their contracts. The position of these banks is that their contracts supersede the new law. The state of Texas, even though it does not require merchants to ask for ID, takes the opposite view. The matter may have to be settled through litigation.



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