Commonly known as stock or investment fraud, securities fraud is the name of the misleading practice that encourages investors to purchase or make financial decisions based on incorrect and false information about investment contracts, municipal bonds and bank notes. Securities fraud can also happen when someone lies about a company and the value of a company’s stock. When someone working in the securities and investment world who works one-on-one with clients lies, steals or cheats to self-profit, they are engaging in securities fraud, which is prosecutable on a state and federal level. Securities fraud can come in a few different forms, and it’s important to know what to be aware of. Read along to learn the ways in which securities fraud can take form.
Insider trading occurs when an individual knows private, confidential information about a company and uses the information to buy or sell a security and profit from that sale. For example, if an individual notices that their company is inching close to bankruptcy and decides to sell stock to avoid it without disclosing the information to the public, they are taking part of insider trading.
Third Party Misrepresentation
Third Party misrepresentation happens when a third party lies about the profitability of a company or about the stock market. A common misrepresentation scheme is called “pump and dump,” which happens when an individual buys a large amount of stock from a fairly small company, and then lies about the profitability about the company in order to get others to purchase stock. Then, once the stock prices for the company have significantly increased, that individual will sell their shares for a large profit. This is considered securities fraud.
Churning is a type of securities fraud where a client’s financial activities are manipulated. In a situation like this, a broker or salesperson would encourage their client to excessively sell or purchase securities without a good reason in order to charge higher fees and generate a larger commission. This type of financial behavior is unethical and illegal because they have a responsibility to their client and their financial interests.
While securities fraud is watched by the state and federal governments, it’s still critical to be aware of who is handling your investments and how they are doing it. On their website, Federal Bureau of Investigation lists out warning signs to be mindful of to avoid fraud. Some of these warning signs include offers that sound too good to be true, unsolicited investment offers, a seller’s interest in personal information, like credit card and social security numbers over the phone or Internet, and high pressure sales tactics.
If you do find yourself tangled up in securities fraud, our securities litigation services at Sadis and Goldberg LLP could be beneficial to you. Contact us today.