Securities fraud
Criminal law |
---|
Elements |
Scope of criminal liability |
Severity of offense |
|
Inchoate offenses |
Offense against the person |
Sexual offenses |
Crimes against property |
Crimes against justice |
Crimes against the public |
Crimes against animals |
Crimes against the state |
Defenses to liability |
Other common-law areas |
Portals |
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.[1] [failed verification][2][3] The setups are generally made to result in monetary gain for the deceivers, and generally result in unfair monetary losses for the investors.[4] They are generally violating securities laws.
Securities fraud can also include outright theft from investors (
Types of securities fraud
Corporate fraud
Corporate misconduct
Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at
Dummy corporations
Internet fraud
According to enforcement officials of the
When the price reaches a certain level, criminals immediately sell off their holdings of those stocks (the "dump"), realizing substantial profits before the stock price falls back to its usual low level. Any buyers of the stock who are unaware of the fraud become victims once the price falls.[12]
The SEC says that Internet fraud resides in several forms:
- Online investment newsletters that offer seemingly unbiased information free of charge about featured companies or recommending "stock picks of the month". These newsletter writers then sell shares, previously acquired at lower prices, when hype-generated buying drives the stock price up. This practice is known as scalping. Conflict of interest disclosures incorporated into a newsletter article may not be sufficient. Accused of scalping, Thom Calandra, formerly of MarketWatch, was the subject of an SEC enforcement action in 2004.[13][14]
- Bulletin boards that often contain fraudulent messages by hucksters.[15]
- E-Mail spams from perpetrators of fraud.[16]
- Phishing
Insider trading
There are two types of "insider trading". The first is the trading of a corporation's stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than ten percent of the firm's shares. This is generally legal, but there are certain reporting requirements.[17]
The other type of insider trading is the purchase or sale of a security based on material non-public information. This type of trading is illegal in most instances. In illegal insider trading, an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise misappropriated.[18]
Microcap fraud
In microcap fraud, stocks of small companies of under $250 million market capitalization are deceptively promoted, then sold to an unwary public. This type of fraud has been estimated to cost investors $1–3 billion annually.[19] Microcap fraud includes pump and dump schemes involving boiler rooms and scams on the Internet. Many, but not all, microcap stocks involved in frauds are penny stocks, which trade for less than $5 a share.
Many penny stocks, particularly those that sell for fractions of a cent, are thinly traded. They can become the target of
Penny stock companies often have low liquidity. Investors may encounter difficulty selling their positions after the buying pressure has abated, and the manipulators have fled.
Accountant fraud
In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies' financial status. In several cases, the monetary amounts of the fraud involved are in the billions of USD.[28]
Boiler rooms
Boiler rooms or boiler houses are stock brokerages that put undue pressure on clients to trade using telesales, usually in pursuit of
Short selling abuses
Abusive
Ponzi schemes
A Ponzi scheme is an
Pervasiveness of securities fraud
The
A 2023 study by economists Alexander Dyck, Adair Morse and Luigi Zingales estimated that on average 10% of large publicly traded firms commit securities fraud every year, and that the corporate fraud destroys 1.6% of equity value each year.[34]
Class action securities fraud lawsuits rose 43 percent between 2006 and 2007, according to the Stanford Law School Securities Class Action Clearinghouse. During 2006 and 2007, securities fraud class actions were driven by market wide events, such as the 2006 backdating scandal and the 2007 subprime crisis. Securities fraud lawsuits remained below historical averages.[35]
Some manifestations of this
Securities fraud is becoming more complex as the industry develops more complicated
A study conducted by the New York Stock Exchange in the mid-1990s reveals approximately 51.4 million individuals owned some type of traded stock, while 200 million individuals owned securities indirectly. These same financial markets provide the opportunity for wealth to be obtained and the opportunity for white collar criminals to take advantage of unwary investors.[citation needed]
Recovery of
Sometimes the losses caused by securities fraud are difficult to quantify. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.[36]
Characteristics of victims and perpetrators
Any investor can become a victim, but persons aged fifty years or older are most often victimized, whether as direct purchasers in securities or indirect purchasers through pension funds. Not only do investors lose but so can creditors, taxing authorities, and employees.
Potential perpetrators of securities fraud within a publicly traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to:
- overstate assets
- overstate revenues
- understate costs
- understate liabilities
- understate penny stock
Other effects of securities fraud
Even if the effect of securities fraud is not enough to cause bankruptcy, a lesser level can wipe out holders of common stock because of the leverage of value of shares upon the difference between assets and liabilities. Such fraud has been known as watered stock, analogous to the practice of force-feeding livestock great amounts of water to inflate their weight before sale to dealers.
Penny stock regulation
The regulation and prosecution of securities fraud violations is undertaken on a broad front, involving numerous government agencies and
See also
- List of securities frauds
- Accounting scandals
- Illicit financial flows
- Insider trading
- Microcap stock fraud
- Penny stock
- Pyramid scheme
- Selling away
- White-collar crime
References
- ^ "Securities Fraud Awareness & Prevention Tips faq by FBI, accessed February 11, 2013
- ^ Nathaniel Popper (February 10, 2013). "Complex Investments Prove Risky as Savers Chase Bigger Payoff". The New York Times. Retrieved February 11, 2013.
- ^ "2012 NASAA Top Investor Threats". North American Securities Administrators Association (NASAA). 2011-08-31. Retrieved February 11, 2013.
A con artist will use every trick in the book to take advantage of unsuspecting investors, including exploiting well-intended laws, in order to fatten their wallets
- ^ "Fraud and Financial Crimes". Thomson Reuters. Last updated June 20, 2016
- ^ "Testimony: Testimony Concerning Insider Trading(Linda Chatman Thomsen, September 26, 2006)".
- ^ Norris, Floyd (April 14, 2005). "Trading Scandal May Strengthen Stock Exchange". New York Times. Retrieved May 3, 2008.
- ^ San Francisco FBI web link, supra
- ^ "The President's Leadership in Combating Corporate Fraud". Georgewbush-whitehouse.archives.gov. Retrieved 2012-02-18.
- ^ Kang, Cecilia (2008-05-16). "Ex-PurchasePro Chief Found Guilty of Fraud, Obstruction". washingtonpost.com. Retrieved 2012-02-18.
- ^ ABCnews.go.com, Retrieved May 18, 2008
- ^ "Updated Investor Alert: Social Media and Investing -- Stock Rumors". Sec.gov. Retrieved 2015-11-15.
- ^ "Internet Fraud: How to Avoid Internet Investment Scams". Sec.gov. Retrieved 2012-02-18.
- ^ "SECURITIES AND EXCHANGE COMMISSION, Plaintiff, I COMPLAINT VS. THOM CALANDRA, Defendant" (PDF). sec.gov.
- ^ Vardi, Nathan. "Calandra Quits Amid Probe, Forbes, January 23, 2004, article". Forbes.com. Archived from the original on 2008-12-05. Retrieved 2013-11-21.
- ^ "Internet Fraud". Sec.gov. Retrieved 2013-11-21.
- ^ "N.Y. broker charged in e-mail spam stock scam". Usatoday.Com. 2011-02-02. Retrieved 2013-11-21.
- ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 584
- ^ Laws that Govern the Securities Industry U.S. Securities and Exchange Commission, accessed March 30, 2007
- ^ a b "Securities Investor Protection Corporation > Who > Not FDIC". SIPC. Retrieved 2013-11-21.
- ^ SEC (2005-01-11). "Pump&Dump.con". U.S. Securities and Exchange Commission. Retrieved 2006-11-21.
- ^ FINRA (2012). "Spams and Scams". Financial Industry Regulatory Authority. Retrieved 2012-07-29.
- ^ Harry Domash (2000-06-12). "Internet Makes Scams Easy". San Francisco Chronicle. Retrieved 2006-06-15.
- ^ Zakarin, Jordan (11 January 2011). "Importing By Encouraging Fans To Invest". Huffington Post. Retrieved 30 March 2012.
- ^ "Lithium Exploration Group: Beware of Mailmen Bearing Gifts". Seeking Alpha. 10 May 2011. Retrieved 30 March 2012.
- ^ Gary Weiss (1997-12-15). "Investors Beware". Business Week. Archived from the original on 2013-01-02. Retrieved 2006-06-15.
- ^ Lithium Exploration Group (2012-07-17). "LEXG Answers Dean Beeby of The Canadian Press on Lithium Mining". the chairmans blog. Archived from the original on 2013-01-04. Retrieved 2013-11-21.
- ^ "Lithium Exploration Group Inc. News - Company Information - The New York Times". Topics.nytimes.com. Retrieved 2013-11-21.
- ^ a b Thomas, Cathy Booth (18 June 2002). "Called to Account". Time. Archived from the original on July 8, 2002 – via time.com.
- ^ "Key Points About Regulation SHO". Securities and Exchange Commission. Retrieved May 4, 2008.
- ^ Anderson, Jenny (April 30, 2008). "A New Wave of Vilifying Short Sellers". New York Times. Retrieved May 15, 2008.
- ^ "Bernard Madoff Gets 150 Years in Jail for Epic Fraud". Bloomberg. 2009-06-29. Retrieved 2009-08-05.
- ^ "Madoff mysteries remain as he nears guilty plea". Reuters. 2009-03-11. Retrieved 2009-08-05.
- ^ "Iowa Insurance Division" (PDF). Archived from the original (PDF) on September 23, 2006. Retrieved May 9, 2008.
- ISSN 1573-7136.
- ^ "Stanford Securities Class Action Clearinghouse" (PDF). Retrieved May 26, 2008.
- ^ "The World Price of Insider Trading" by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (Feb. 2002)
- ^ "How Milwaukee's Famous Beer Became Infamous". The Beer Connoisseur. Archived from the original on 2013-05-16. Retrieved 2013-11-21.
- ^ Hall, James (2009-11-14). "Woolworths: the failed struggle to save a retail giant". London: Telegraph. Retrieved 2013-11-21.
- ^ Hemmings.com. "Classic Cars for Sale - Hemmings Motor News".
- JSTOR 258141.
- ^ "SECURITIES AND EXCHANGE COMMISSION" (PDF). sec.gov.
- ^ "SEC Charges Eight Participants in Penny Stock Manipulation Ring". U.S. Securities and Exchange Commission. May 21, 2009.
- UPI.
- ^ "Georgia Secretary of State". sos.ga.gov.
- ^ "GEORGIA LAW WON'T HURT BROKERS, JUDGE RULES". Deseret News. July 11, 1990.
- ^ Diana B. Henriques (February 16, 2003). "Penny-Stock Fraud, From Both Sides Now". New York Times.
External links
- New York Attorney General Report on Microcap Stock Fraud
- President's Corporate Crime Task Force
- Significant Criminal Cases, Department of Justice website
- Stanford Securities Class Action Clearinghouse
- Public Investor Arbitration Bar Association "PIABA"
- Billion Dollar Investment Fraud, FBI
- U.S. Securities and Exchange Commission Investor Alert: 10 Red Flags That an Unregistered Offering May Be a Scam