Securities fraud, also known as stock fraud, brokerage fraud, and investment fraud, is catch-all term that encompasses the panoply of wrongdoing that a stockbroker can commit. When people ask me what I
do, I state, “I am a securities fraud lawyer.” Securities fraud can take the form of any deceptive practice on the part of the stockbroker in dealing with his customer regarding investment decisions. The reason that securities fraud is
so encompassing is because fraud necessarily permeates all wrongdoing. Let’s take the example of an investor who is wronged for one reason: the stockbroker churned her account. This is a securities fraud claim, because the stockbroker
likely did not tell the investor that he was turning her account and costing her money in commissions that she needlessly paid. This was fraudulent. Fraud can mean either a misrepresentation or an omission. Stockbrokers, by their licensing,
are required to advise investors of all material facts. When they fail to do so, that constitutes a fraud claim.
Breaking Down Securities Fraud
Allegations of securities fraud are also investigated by the Securities and Exchange Commission (SEC) and FINRA (Financial Industry Regulatory Authority). These investigations can result in civil penalties, injunctions, and sometimes crime. The SEC can decide to bring a case in federal court or within the SEC before and Administrative Law Judge. The SEC website lists the following common violations that may lead the SEC to investigate:
Misrepresentation or omission of important information about securities
Manipulating the market prices of securities
Stealing customers' funds or securities
Violating broker-dealers' responsibility to treat customers fairly
Insider trading (violating a trust relationship by trading on material, non-public information about a security)
Selling unregistered securities.
Securities fraud is also a crime that can be brought by prosecutors and which can result in imprisonment and fines. The Department of Justice has a Fraud Section that employs approximately 140 prosecutors. One of the Units within the Fraud Section is the Securities & Financial Fraud Unit. The Unit partners with United States Attorney’s Offices around the country. It also works closely with the SEC and other agencies. The Unit lists the following types of fraud cases it prosecutes:
Financial Institution Fraud
Insider Trading Fraud
Market Manipulation Fraud
The last decade is riddled with several large, shocking securities fraud cases. There was Bernie Madoff’s $65 billion-dollar Ponzi scheme fraud. This case also made news because the SEC missed several opportunities to stop the fraud. Enron’s bankruptcy in 2001 shocked the world when a massive accounting fraud wiped out $78 billion dollars in stock market value. This fraud led to the collapse of Arthur Anderson and the Saar Bain – Oxley Act of 2002. Then there was the fraud-induced bankruptcy of WorldCom, which resulted in a fraud conviction of its CEO Bernard Ebbers, who is serving 25 years in federal prison. The government had to take over Fannie Mae in 2008 because the company had misled investors about the extent of its holdings of higher–risk mortgage loans during the financial crisis.
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