This concept encompasses a variety of white-collar illegal activities revolving around the deception of investors and other crimes aimed at manipulating financial markets (Straney, 2011). In this type of white-collar crime, an individual or an organization misrepresents information that the investors rely on to make their long and short-term decisions concerning their projects. When these investors are presented with the wrong information, they end up making huge losses. These persons or companies may be banks (corporate or investment), stockbrokers or brokerage firms (Straney, 2011). When security fraud is committed, investors make purchases and sales based on uninformed judgments or due to the forged information provided in the stock or merchandise markets.
The unsophisticated investors with the likelihood of having an inability of evaluating risk adequately are the ones mostly offered risky investment opportunities, which eventually end up in huge losses. Security fraud can be in the form of absolute theft of the investors, such as embezzlement misstatements on financial reports and lying to the business auditors (Straney, 2011). Stock and investment fraud may be committed by the persons/firms withholding important information, presenting false information, or misinformation advice to the investors. These crimes may also include committing accounting fraud, insider trading, filing false information to the Securities and Exchange Commission, front running and manipulating prices of stocks (Baker et al., 2007).
The punishment was given to individuals and firms committing securities fraud range from civil to criminal penalties that attract penalties and imprisonment (Kun, 2005). Most victims of securities fraud are the old investors, such as those of fifty years and above from their direct purchases or indirectly through pension funds. Mostly, the investors are the victims, but in some cases, employees, creditors, and taxing authorities lose in the securities fraud too. Dishonest officials in a corporate are mostly the perpetrators of securities fraud, especially those that can access employee payrolls and other financial reports. With this information, they can be able to understate costs and liabilities as well as overstate revenues and assets (Kun, 2005).
Types of Securities Fraud
Corporate fraud is executed by high-level business officials to manipulate information and cause huge losses to investors. The most common corporate fraud is that committed at Enron to a point that the government of the USA announced and described aggressive agenda to fight corporate fraud. Corporate fraud has increased since early 2000 and currently, several less widely publicized corporate commit securities fraud. Some fraudsters also create the illusion of existing businesses and end up misleading investors with dummy corporations. These fraudsters use similar names as some of the real corporations and trick investors into buying shares and investing with them, and the investors think they are dealing with the real corporation.
Insider trading can be doing business with the company’s stock by persons who are part of the corporation, such as officers, directors, key company workers, and other significant shareholders, especially those with over ten percent shares of the entire corporation (Straney, 2011). However, this is mostly legal but becomes a criminal offense when it is used for fraud purposes and to cause losses to investors. In addition, an insider can commit fraud by using material non-public information to purchase or sell a security. These people use the non-public information after acquiring it during the performance of their inside duties at the corporation, which is in most cases illegal.
In this kind of fraud, the brokerages put too much pressure on their clients to sell using Telesales, which is usually in quest of microcap schemes (Wang, 2005). Mostly, these transactions are provided to the clients in a fraudulent manner with an aim of benefiting the brokerage in disguise. Though some may be from licensed brokerage houses, most are not licensed and deal with the private placement, non-existent stock, and supplies by an agent at an undisclosed gain.
Mutual Fund Fraud
This type of fraud involves scandals, such as insiders misleading investors with information about short-term trading (Wang, 2005). For instance, brokerages and mutual fund firms may mislead their customers with information about when to trade and how to meet the market timing. For example, the case involved SEC and the Bank of America Capital Management carrying out secret provisions for their clients to permit them into short-term trading.
Fraudsters engage in crimes over the Internet like coming up with pump-and-dump schemes on their victims through chat rooms, spam emails, Internet boards, and other forums held via the Internet. According to the Securities and Exchange Commission, these criminals cause dramatic price rises on thinly traded stocks or non-existent stocks from the “pump” companies. These fraudsters generate huge profits from their holdings of stock and only when the prices fall that the customers realize they have been victims of Internet fraud.
These fraudsters use investment newsletters on the Internet with messages that seem impartial to the highlighted companies. This information reaches the targeted victim free of charge and the advertising stock picks a certain time like the specific month. Corporate shares formerly obtained at lower prices are then traded at higher prices (Straney, 2011). Bulletin boards containing fraudulent messages, and phishing and scalping are other forms of Internet fraud that the fraudsters use on their victims to generate huge profits in a short time.
Short Selling Abuses
This involves providing false information about stocks in the corporation to the investors and ultimately driving down their prices and causing huge losses to the investors (Straney, 2011).
This is an investment fraud that involves financed withdrawals by the investors from the corporations instead of profit withdrawals made from the investment activities. This type of fraud causes very huge loss of money to the business.
Stock promoters and manipulators deceive small corporations of under two hundred million dollars to promote their stocks and sell them to the unsuspecting public. Microcap fraud cost investors between one to three billion dollars per year and mostly involve” pump and dump” schemes and other Internet fraud (Wang, 2005). Penny stocks are mostly prone to microcap fraud and are sold for about five dollars a share. These stocks are thinly traded and their prices are later raised to generate profits to the fraudsters. The scammers do this by buying a lot of stock and then providing misleading information comprised of affirmative statements about the stock prices, and they later increase the share price.
The scammers then proceed to utilize the Internet through chat rooms, spam emails to raise the interest of their unsuspecting victims. This leads to millions of individuals and corporate buying shares and later incurring huge losses. In such cases, an insider will convince an unwilling investor by telling them that they have “inside” information over impending news and trick the investor into buying the shares. The pressure imposed on the investors to persuade them into buying the shares, pushes the price of the shares even further, causing hype in the shared business (Wang, 2005).
The hype convinces more investors into buying the shares because they get more enticed and believe it is a good and genuine deal. The victims end up incurring huge losses and the fraudsters generate massive profits from the stocks and the commodities. A recent case is that involving artist 50 Cent, where he benefited from 8.7million dollars after selling thirty million shares of the business. Another example is the one that involved LEXG, where they used direct email to campaign over the stock sales, and made over three hundred and fifty million dollars from the promotional claims.
In early 2000, there became a rise in the wave of accounting scandals in the USA, where many of the big companies provided false information over their corporate clients (Straney, 2011). In account fraud, a corporation provides false financial reports, which end up misleading investors during decision-making and the fraud involves billions of money (Straney, 2011). For instance, in the USA, many big corporations such as PricewaterhouseCoopers and Deloitte & Touché, among others have been involved in this kind of fraud.
Detection and Prevention of Securities Fraud
People should be vigilant all the time to be able to recognize warning signs, which may include the deal sounding too good to be real, the seller using pressuring sales mechanisms, unsolicited offers, or the sellers that are seeking personal information (Baker et al., 2007). People should always confirm the legitimacy of the claims through the federal and state securities regulators and should always get a copy of all the transactions made. All suspected and identified scammers should be promptly reported to the Securities and Exchange Commission or the nearest law enforcement agency (Straney, 2011)
Baker, N. A., & Kirkpatrick & Lockhart Nicholson Graham. (2007). The securities enforcement manual: Tactics and strategies. Chicago: American Bar Association.
Kun, Y. C. (2005). The effective regulation of transnational securities fraud in global markets*. Journal of International and Area Studies, 12(2), 77-92. Retrieved from http://search.proquest.com/docview/223819252?accountid=45049
Straney, L. L. (2011). Securities fraud: Detection, prevention, and control. Hoboken, N.J: John Wiley & Sons.
Wang, Y. (2005). Securities fraud: An economic analysis. (Order No. 3178719, University of Maryland, College Park). ProQuest Dissertations and Theses, , 110-110 p. Retrieved from http://search.proquest.com/docview/304991037?accountid=45049. (30499103