Securities fraud can erode the integrity of financial markets and lead to serious financial consequences for investors. While the methods used may vary, these schemes often involve misleading statements or deceptive practices that influence people to buy or sell securities under false pretenses.
Whether investing as a property owner or managing assets in a portfolio, understanding how these fraudulent practices work can help you protect yourself from financial harm. Below are the most common types of securities fraud recognized under federal law.
Insider trading
Insider trading happens when someone with non-public information about a company’s future acts on that knowledge by buying or selling stock. This is typically someone within the company, such as a director or employee, but can also include those tipped off by insiders. Trading on privileged information violates federal securities law and can carry serious criminal penalties.
Fraud by company leadership
One of the most well-known forms of securities fraud occurs when company executives misrepresent the financial status of their organization. This could involve overstating profits, hiding liabilities or issuing false statements in financial disclosures. When these inaccuracies artificially inflate stock value, investors may buy in based on misinformation—only to suffer losses when the truth emerges. The Enron scandal is a well-known example of this type of fraud.
Third-party misrepresentation
Fraud is not limited to internal actors. Brokers, promoters or other third parties can commit securities fraud by spreading false or misleading information. A common example is a pump-and-dump scheme, where someone hypes a low-cost stock to inflate its value and then sells their shares at a profit, leaving other investors with worthless holdings.
While the SEC and Department of Justice actively investigate and prosecute securities fraud, prevention begins with informed investing. Be cautious of unsolicited investment advice, verify information with reliable sources and avoid deals that sound too good to be true.
If you are concerned about your investments or facing allegations of securities fraud, seeking legal guidance can help you assess your situation and take the appropriate next steps.
