What is Securities Fraud? A Comprehensive Overview

Securities fraud, or stock fraud, is an umbrella term for deceptive maneuvers employed by brokers, investment firms, and even companies or individuals. These schemes aim to manipulate investors through false information, ultimately causing financial harm for the perpetrator’s personal gain.

How common is securities fraud? To put it into perspective, the SEC secured a hefty $4.949 billion in financial remedies for fiscal year 2023, ranking second highest in its history. The SEC distributed $930 million to harmed investors in the fiscal year 2023, marking the second consecutive year with more than $900 million in distributions.

Whistleblowers (often victims) or insiders with information of securities fraud exceeding $1 million may be eligible for an award from the Securities and Exchange Commission (SEC). Continue reading to get a complete overview of securities fraud, and learn how to blow the whistle if you have original and credible evidence of it happening.

There are several common types of securities fraud violations by the Securities and Exchange Commission (SEC) and our attorneys are on the lookout for, which include the following:

Insider Trading
Insider trading is by far one of the most common, and pervasive examples of securities fraud. This type of fraud involves industry “insiders” sharing non-public information about the company that will allow them to make decisions about buying or selling of that company’s stock.

The types of insiders engaging in this illegal activity typically include executives, board members, accountants, or company lawyers. What’s illegal here is the sharing of “non-public information” – once these insiders have made (or prepared to make) their trades, retail investors are left in the wake and often experience losses.

Accounting Fraud
Accounting fraud occurs when an insider deliberately manipulates a company’s financials to make it appear healthier than it actually is. Some tactics often include inflating revenues or hiding debts, falsifying expenses, or pressuring others to “fudge the numbers.” Companies do this to mislead investors, creditors, or the general public, making themselves look positive in order get more investors on board.

Misappropriating Assets
Also known as theft, misappropriating assets occurs when a broker or investment advisor deliberately steals or misdirects investor cash or assets, such as stocks or bonds, into unauthorized accounts. This can include the theft of contributions paid into employer-sponsored retirement plans. This is a huge breach of fiduciary duty, which causes major harm to individuals.

Ponzi Schemes
A Ponzi scheme is an investment schemes that promises future returns on a particular investment, which may or may not be real. The scheme requires a constant flow of new investors to be brought into the scheme for it to succeed. The cash from new investors is used to pay back the original investors, plus their return, which is also fake to make it appear legitimate.

Market Manipulation
Market manipulation occurs when an individual or group of individuals interferes with the natural flow of the market in their favor to make a profit. This could include spreading false information about a company’s performance, including its financial health, or spreading rumors about a pending merger or acquisition. Or something as simple as buying and selling rapidly to increase trading volume, which drives interest (and increases the stock price).

Pump-and-dump Schemes
Pump-and-dump schemes are a type of market manipulation where a fraudster artificially inflates, or “pumps” up the price of a stock or cryptocurrency by heavily promoting it on social media, forums, or online communities such as Discord. When that stock reaches a desired price, they then sell, or “dump” the stock or cryptocurrency quickly, making a profit at the inflated price. Investors who bought the stock are left holding a stock “bag holding” worth much less than its original value.

Offering Unregistered Securities
In the United States, all securities must be registered unless a special exemption applies. Unregistered securities, which are not monitored by the SEC or any other authority, are primed for abuse by fraudsters touting extremely risky investment products. This could anything from an equity interest in a startup business or an unregistered initial offering.

Omitting Material Information
This often involves a broker or financial advisor omitting important information about a company’s health, such as the risks it is facing, or the risks associated with a particular investment. Brokers have a fiduciary responsibility to inform their clients o fall risks associated with an investment, and to omit information can jeopardize the financial health of an investor. Furthermore, if an investor provides false or misleading information about an investment, this also goes against a broker’s or investment advisor’s fiduciary responsibility and could be considered fraudulent.

Unauthorized Trading
This happens when a broker or financial advisor buys or sells securities in a client’s account without their permission. There are many reasons why a broker or financial advisor might due this, such as to manipulate the price of a stock.

Microcap Fraud
Microcap stock fraud targets small, thinly traded companies (microcaps) whose stock prices can be easily manipulated. Fraudsters might use misleading press releases, fake analyst reports, or artificial trading activity to inflate the price for a quick profit.

Boiler Rooms
Boiler rooms are high-pressure sales operations that aggressively push unsuitable investments over the phone. They often target elderly or inexperienced investors with promises of unrealistic returns.

High-Yield Investment Fraud
This involves enticing investors with promises of unusually high returns, often with little to no risk. These schemes can involve various products, but they all share the characteristic of being too good to be true.

Hedge Fund Fraud
While hedge funds themselves are not inherently fraudulent, there have been cases of abuse within the industry. Hedge fund fraud could involve misleading investors about the fund’s strategy or risk profile, or even embezzlement of investor funds.

Foreign Currency Fraud
Fraudsters may exploit the complexities of foreign currency markets to take advantage of investors. Forex fraud can involve rigged currency exchanges, fake investment opportunities, or manipulating forecasts to mislead investors.

Abusive Short Selling
Short selling involves borrowing shares of a stock, selling them, and hoping to repurchase them later at a lower price to return to the lender and pocket the difference. Abuses can occur through manipulating the borrow rate (the fee to borrow shares) or engaging in naked short selling, where someone sells borrowed shares they haven’t secured yet.

Offering Frauds
Initial offering frauds involve the illegal sale of unregistered securities. Fraudsters may create unregistered investment schemes or manipulate offerings to mislead investors about the true nature of the investment.

Cryptocurrency Frauds
The volatility and relative anonymity of the cryptocurrency market make it susceptible to fraudulent activity. Examples include “exit scams” where developers abandon a project after raising funds through an initial coin offering (ICO), or fake cryptocurrency exchanges designed to steal investors’ funds.

Affinity Fraud
Affinity fraud is a specific type of investment fraud that preys on members of identifiable groups, exploiting the trust and camaraderie within the group. The fraudster will present an investment opportunity, often downplaying the risks and exaggerating the potential returns. The money invested goes straight to the fraudster’s pocket, not into any real investment. They may use some of it to pay out initial “returns” to create the illusion of success and keep the scheme going. Eventually, the scheme falls apart when the fraudster can’t find new investors or maintain payouts to existing ones.

Please be aware, this is not an exhaustive list, and new frauds emerge all the time. The SEC cannot spot every instance of securities fraud, which is why whistleblowers and insiders are so important to maintaining the integrity and health of financial markets.

There are a wide number of individuals who often perpetrate securities fraud. Here is a breakdown of some of the most common:

• Brokers and Financial Advisors: stockbrokers and financial advisors have a responsibility to have their client’s best interest, providing sound investment advice. However, there are some motivated by greed who might steal from an account or make unauthorized trades for their own profit.
• Brokerages or Investment Advisory Firms: some firms might not acknowledge the violations performed by a broker of their firm; or they themselves may be involved in the market manipulation themselves.
• Corporate Officers: executives or directors of companies who have access to inside information or financial statements.
• Publicly Traded Companies: entire companies can be involved in a fraudulent scheme, where they misrepresent the health of their company to trick investors.
• Unlicensed Sellers: people who are not properly licensed to sell securities, who are typically selling fraudulent investment products.
• Celebrities or Social Media Influencers: there are numerous cases of celebrities and content creators touting bogus investments; some are even paid to promote them.
• Scammers: these are typically boiler room operations using high-pressure sales tactics to shill penny stocks to inexperienced investors promising them guaranteed returns.

These are just a few examples of those who commit securities fraud. The landscape is constantly evolving, and new methods emerge every day. Not everyone is out to cheat investors. However, being aware of the risks of investing can go a long way to protecting you against potential fraud.

Just remember, if an investment sounds too good to be true probably is. Some general tips to stay safe from securities fraud include:

• Be skeptical of unsolicited investment offers
• Do your own research and invest with reputable institutions
• Diversify your investments to avoid overexposure to risk
• Never share your financial information with anyone you don’t trust
• Report any suspicious activity to regulatory agencies

You should always compare any promised return with the returns on well-known stock indexes. Any investment opportunity that claims you’ll receive substantially more than that could be highly risky – or be an outright fraud. If you know of an instance of securities fraud, continue reading to learn more about what you can do to hold fraudulent actors accountable.