What is securities fraud?

Otherwise known as investment or stock fraud, securities fraud is a practice that coaxes shareholders to form their buying decisions based on falsified information. Ultimately resulting in a loss for the investors, it is estimated that securities fraud is results in approximately $40 billion per year. There are several different forms of investment fraud, including insider trading and corporate scams.

What is known as a "dummy corporation" is created by crooks to sound like an actual corporation. They sell stock in the dummy corporation's name to a shareholder who believes they are receiving shares in a similarly-sounding company that actually exists. In all reality, the investor has been duped out of their money with nothing to show for it.

Another type of fraud in relation to securities trading occurs on the internet. A "Pump-and-Dump" ruse is utilized by criminals who wish to "pump" up the price of stocks that are seldomly traded. They plug themselves into chat rooms, bulletin boards and even email (known as spamming) and spread falsified information about certain stocks. When enough shareholders have invested their money and the price reaches a certain level, the criminals "dump" their shares, allowing them to gain a high return while the other unknowing buyers become victims of fraud.

Corporate fraud occurs when high-level officials in a company knowingly present falsified profits to the public. There are several reasons why officials do this. False earning reports can hide things like debt and unapproved bonuses for high-level employees. Also, overstating earnings allow the company's stock value to increase which in turn grants the corporation to borrow more funds for expansion. Some officials take advantage of the inflated stock price and sell their shares for a higher profit than what they are actually worth. Also affiliated with corporate fraud is insider trading. This type of securities scam involves employees of a company who have access to earnings reports that are not available to the public. The information is obtained by the employee while performing their specified job at the company.

Accountant fraud is associated with securites because of the relationship between the accountants and the large companies who utilize their services. When an accounting firm fails to identify or prevent a corporation from publishing deceptive earnings reports that betray the public's impression of their actual financial status, is it considered accountant fraud.

The federal agency in charge of enforcing the regulations and laws pertaining to the securities industry is the United States Securities and Exchange Commission (also known as the SEC). On the advice and consent of the Senate, the President of the United States designates the five Commissioners who are responsible for executing the seven primary laws that pertain to securities.