Securities fraud is fraud related to the buying and selling of securities—investments, or tradable financial assets. In the United States, the U.S. Securities and Exchange Commission regulates the securities market, which includes forbidding, investigating, and penalizing securities fraud. While the SEC does not have the power to bring criminal charges, it can refer cases it believes merit prosecution to federal prosecutors. In addition, it has substantial civil regulatory powers.
Although the SEC is a powerful tool for fighting securities fraud, it may not be able to help individual investors who have been defrauded.
Securities Fraud is Complex
Securities fraud covers a broad spectrum of activity. Some of the things the SEC investigates and penalizes are violations of the law, such as dealing in securities without a license or “selling away” from the broker-dealer’s firm, which means selling a security the firm did not authorize.
But these are not just technical violations—often, they’re signs of a more serious problem. For example, if a broker-dealer is selling away, there’s probably a reason the firm didn’t approve the security for sale. Either the broker-dealer is trying to avoid their firm’s scrutiny, or the security is too risky for their firm to approve. Very often, misrepresentations about the security—for example, not mentioning that the broker-dealer has an interest in it—are part of the package.
Securities fraud also covers more overt forms of deception. These include deception about the risk or return of the security, using insider information to gain an advantage, or fraudulent schemes such as a Ponzi scheme. This kind of fraud can be very lucrative before it collapses or is detected and stopped. The Ponzi scheme run by R. Allen Stanford went on for more than 20 years, allowing Stanford to loot millions of dollars from his investors before he was caught and convicted.
Federal Securities Fraud, SEC Rule 10b-5
Rule 10b-5 generally prohibits a person from engaging in a fraud or misrepresent an investment in order to deceive someone else. However, what constitutes a lie, misrepresentation or fraud is complex and whether the misrepresentation is material is hotly debated. Even a truthful statement out of context or the omission of relevant information can be material and violated the federal securities laws.
