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Dealing with Accusations of Securities Fraud: Know the Different Types and How to Build Your Legal Defense
Being involved in securities trading requires a strong understanding and strict adherence to all state and federal regulations. Failure to do this could lead to being accused of securities fraud, which is a serious crime investigated regularly by the U.S. Securities and Exchange Commission (SEC). Securities fraud refers to various criminal activities but involves utilizing fake or deceptive practices to obtain money from investors. While professional traders and corporate financial officers are often convicted of it, anyone involved with investing could be held accountable.
Securities fraud carries significant civil and criminal penalties under federal and state laws. Such legal action can be initiated by government agencies like SEC as well. A criminal investigation may result in felony conviction that can put someone away behind bars for more than 20 years, along with hefty financial fines.
Below are some common types of securities fraud, reiterated using show don’t tell language:
| Securities Fraud Type | Description |
| Dummy Corporations | Creating a fake company or corporation that sells non-equity stakes to unknowing investors. |
| Pump and Dump | A fraudulent activity that involves influencing other investors to follow a person’s position on a specific security through deceptive information. When the desired price changes, the fraudulent investor closes their position to make significant profit. |
| Ponzi Schemes | It is a way to provide an investor with an opportunity to take an equity stake in a company that does not exist, using later funds from new investors to provide returns for the initial ones. |
| Boiler Rooms | This type of scam utilizes deceptive sales tactics and bothersome high-pressure tricks to sell investments like penny stocks or low-value securities. |
| Insider Trading | This form of fraud concerns trading securities based on unpublicized information about a company which gives an unfair advantage. In this case, anyone with access to such information might misuse it and engage in illegal trading activities that could cause significant losses for innocent traders and shareholders. |
On the other hand, licensed securities brokers are also held by law to avoid engaging in activities that may be detrimental to their clients. This includes but is not limited to:
| Broker Violation | Description |
| Illegal Accounts | Creating a fictitious investment account and placing a client’s funds into their personal accounts. |
| Unauthorized Trades | Carried out by brokers when they make trades that have not been authorized by the client. Although brokerages are authorized to trade as long as there is a written agreement between the client and the broker authorizing such trading, otherwise it violates regulations. |
| Over-Concentration | This occurs when brokers place a client’s majority of funds into a single investment, making it excessively vulnerable to loss. |
| Unsuitability | Making investments that do not align with client needs and goals or investing in risky stocks without disclosing possible risks beforehand. |
| Churning | Selling securities solely for the purpose of obtaining commissions or allowing one’s broker to make trades every day to maximize his earnings while risking their clients’ money. |
An investigation by SEC regarding securities fraud usually begins discreetly. The focus at this stage is on getting evidence, and those under scrutiny are often unaware they’re being investigated. Investigations could involve everything from computer forensics and wiretaps, among other measures, to enable such analysis process. If laws have been broken after completing the investigation, then a search for a person or entity’s office might occur. Advisors who are believed to be involved in fraudulent activities will also be interviewed.
To determine the legal defense strategy for securities fraud allegations levied against you or your business, consulting with an experienced attorney needs to be top priority should any such accusations arise. The Spodek Law Group brings that expertise to the table with knowledgeable attorneys experienced in providing legal defense strategies specifically for financial crimes.
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