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

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.

Tips to Avoid Being a Victim of Securities Fraud

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.

In addition to common sense and diligence when it comes to avoiding securities fraud, you should also keep these tips in mind, according to the United States Securities and Exchange Commission (SEC):

  • Do independent research: any time you are considering an investment, do your own research on the financial entity. It’s not enough to ask the organization questions because they have no reason to be truthful. Instead, see what other consumers are saying, whether any reputable organizations know of this agency, or if they are registered with the SEC. If there’s no real footprint, the entity might be fraudulent.
  • Assess their record: in addition to finding more information about the institution, you can also check online databases to see whether this entity has been involved with regulators or consumers before.
  • Know what to look for: hopefully this blog helps on this count, but you want to make sure you understand the types and signs of fraud. It is difficult to know if you are being duped if you aren’t sure what constitutes legitimacy.

As a securities law firm in New York City, our team of attorneys is highly knowledgeable when it comes to the complex landscape of securities litigation.

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.