Securities Fraud: What It Is and Why You Need to Know

Securities fraud

Many may remember when Martha Stewart – the creator of the Martha Stewart Living magazine and television show – went to prison. What you may not know is that she wasn’t just charged with insider trading, but with conspiracy, obstruction of justice and securities fraud linked to a trade she made in 2001.

Stewart’s trial centered around the cover-up attempt made by herself and her broker, Peter Bacanovic. Stewart was convicted, fined and spent 5 months in a minimum security prison and 5 months in home confinement on her Bedford, N.Y. estate. Mr. Bacanovic received a very similar sentence.

What is Securities Fraud?

A security is a term describing several types of investments: municipal bonds, corporate stocks, bank notes, and investment contracts, among others. When a person involved in one of these types of investments lies, cheats or steals in an attempt to gain financial advantage, it is called a securities fraud.

Companies issuing securities can be convicted of fraud and so can individuals buying, selling or trading securities. These are some of the main ways securities fraud is committed:

  • Misrepresentations: To make a profit in securities, one must know the current value of the security and make a judgment about its future value. If a trader knows what a security’s value will be, he or she can make an investment designed to profit from that future value. A trader could attempt to manipulate a security’s value by misrepresenting information he or she knows would influence its value.
  • Insider trading: When a person who is part of a company and knows information the public does not tries to make a profit by buying or selling a security based on that knowledge, this is insider trading. Some insider trading is legal if it is reported to securities regulators.
  • Churning: Securities brokers are fiduciaries. They have a legal duty to do what is in the client’s best interests and not to benefit the broker’s interests. Churning is when a broker convinces his client to trade excessively, against the client’s best interests, to gain more fees or commissions.
  • High Yield Investment Frauds: when a broker promises high rates of return with little or no risk involving various forms of investments including securities, commodities, real estate, precious metals, etc. These kinds of frauds often sound “too good to be true” and victims of this type of fraud tend to be contacted by telephone, email or in person with offers that are unsolicited.
  • Ponzi & Pyramid Schemes: Brokers in these frauds use money from more and more new clients to pay the high rates of return promised to earlier “investors” but there is no actual investment being made and those at the bottom, or newer “investors” simply lose money.
  • Advance Fee Schemes: Like a pyramid scheme, these schemes have no legitimate underlying investment. Victims are solicited to pay relatively small amounts of money in hope of realizing larger gains but the gains never materialize. These initial sums or fees are often advertized to victims as fees needed to cover taxes or processing fees.

Penalties for Securities Fraud

As you can see, securities fraud can affect a wide range of people. You may even be a victim and not realize if you have encountered unsolicited “get rich quick” offers and manipulative sales tactics.

The best way to protect yourself is to identify the warning signs, take action and report a scam if it happens to you. Does it sound too good to be true? Did the seller ask for your personal information? Take your time to do your own research. If a company is legitimate, it will be able and willing to provide you with documentation.

The penalties for securities fraud can range from very severe – years in prison and enormous fines and restitution – to something relatively light as in the sentence Martha Stewart received. Generally, penalties will be comprised of one or more of the following:

  • Fines – amount depending upon the circumstances of the case.
  • Incarceration – any conviction of federal securities fraud can result in a 5-year federal prison sentence per offense.
  • Probation – usually lasting several years, though terms of 5 years or more are possible.
  • Restitution – fraud often involves investors, employees, clients or others who suffer monetary loss. When restitution is ordered, this is on top of any fines and repayment of money defrauded.

Take Away

Even if you are embarrassed that you were scammed, it is better to report it than to let it go. The faster you report the crime, the better chance you have of getting your money back. Reports can be made to the Securities and Exchange Commission, state securities regulator, or a law enforcement agency.

Finally, if you are facing charges for securities fraud, it is critical that you seek legal counsel from an experienced securities fraud attorney. These are serious charges. Please contact my office right away.

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