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Securities and Investment Fraud

Securities and Investment Fraud

Securities is a general term which refers to:

  • Stocks;
  • Bonds and debentures;
  • Notes; and
  • A variety of interests which involve an investment where the return primarily or exclusively depends on the efforts of an individual other than the actual investor.

A security is a financial instrument which represents some amount of financial value. In general, they take the form of a certificate which grants the holder rights related to the distributions of profit from a business.

Securities are typically exchanged on securities markets. Securities markets may be subject to manipulative or unfair business practices, which may include insider trading and securities fraud.

Because of these issues, securities markets are regulated heavily by both federal laws and state laws. These securities laws are designed to protect investors.

Securities Law Violations

Each year the Securities and Exchange Commission (SEC) brings somewhere between 400 and 500 civil enforcement actions against individuals and companies which break securities laws. Typical infractions that occur include:

  • Insider trading;
  • Accounting fraud; and
  • Providing false or misleading information regarding securities and companies which issue them.

Violations of securities laws are serious crimes which may result in incarceration and/or substantial criminal fines.

Securities Fraud

Securities fraud is any fraud used in connection with the sale of a security. It is similar to spoofing. The law is generally intended to prevent any one from using a scheme to defraud, make untrue statements, or fail to make a statement that deceives investors. It can also include theft from manipulation of the market, and theft from securities accounts. Examples of securities fraud include:

  • Providing false information on a company financial statement
  • Providing false information on Securities and Exchange Commission (SEC) filings
  • Lying to the company auditors
  • Insider trading
  • Stock manipulation schemes


Churning occurs when a broker engages in excessive trading in an account, often in an attempt to generate additional fees and commissions. Often times the broker will sell the securities that have appreciated to show a small profit, while keeping the losers.


Often, a stockbroker or investment advisor may misrepresent material facts by omitting information or by not disclosing risks that may be associated with an investment to the client.  In both instances, the investment professional can be held liable if the client experiences losses because the professional failed to give the client proper advice.


The law imposes a duty upon securities brokers and investment advisors to only to recommend securities that the they reasonably believe are suitable for the client.  The broker's belief must be based upon a reasonable inquiry of the client's investment objectives, financial situation, tax status and any other relevant information known by the broker.

Failure to Execute Orders

Financial advisors and securities brokers have a duty to properly execute client orders. The broker also has a duty to obtain the best price available for the customer. If the customer places an order to sell a security if the price declines to a certain level, the broker is obligated to do so.  Failure to meet these obligations results in liability for any resulting losses.


Spoofing involves quickly placing an order, then canceling it. The intent is to lure investors into buying or selling at a high or low price. This is also called bluffing. The practice was outlawed by the Dodd-Frank Act, which was passed in 2010. By outlawing the practice of spoofing, the Dodd-Frank Act strives to create and maintain a level playing field for both buyers and sellers.

Spoofing vs. Securities Fraud

Spoofing is similar to securities fraud in as much that they both involve illegal actions to quickly make a profit at the expense of unsuspecting investors. Securities fraud occurs when a trader induces an investor to buy or sell commodities based on false information. Victims of securities fraud typically lose money in the investment.

Enforcement of Securities Law

The Securities and Exchange Commission (SEC) is the agency which is empowered with the sole responsibility of enforcing securities laws in the United States. The SEC's primary mission is to protect investors and to maintain the integrity of securities markets by requiring public companies to disclose meaningful financial and other types of information to the public so that individuals can evaluate security investments.

How Can an Investor Make a Claim?

In order to have a claim for securities fraud, an investor must rely on information given and they must suffer some type of harm. Additionally, the fraud must affect interstate commerce to fall within federal securities fraud laws, but this can be as simple as giving information over the telephone or internet. Additionally, individual states may have their own securities fraud laws that apply.

Penalties for Securities Violations

The legal penalties for a securities violation may be very severe. Even a minor violation may lead to criminal misdemeanor charges, which can be punished by a criminal fine and/or jail time.

More serious violations may lead to felony charges. This may include violations which involve falsifying tax information.

In addition to possible criminal penalties, there are many types of securities violations which can result in civil litigation claims. In these situations, it is common for the holder of the security to file a lawsuit against the trustee who failed to manage the security assets according to professional standards.

If the holder of the security prevails, the trustee may be required to pay damages to compensate them for their economic losses.

Steps To Take to Protect Your Securities Investments

There are numerous steps an individual can take to protect their securities investments. These steps may include:

  • Ensuring that the individual's brokerage firm is licensed;
  • Checking the Central Registration Depository (CRD), which contains information regarding brokers and their licensing; and
  • Staying in contact with the individual's broker.

How Can A Lawyer Help With Securities Laws Issues?

If you have been a victim of securities fraud, you should contact the SEC or the U.S Department of Justice, as well as your state's Department of Justice. If there is sufficient evidence, these agencies may prosecute the person who committed the securities fraud against you. If you are accused of violating federal or state securities fraud statutes, you should speak to a securities lawyer or a financial lawyer to learn more about your rights, your defenses, and the complicated legal system. Your lawyer can advise you regarding the laws in your state and whether any defenses will be available to you.