Securities fraud concept includes a wide range of white collar illegitimate deeds around investors deception among other crimes aimed at manipulating economic markets (Straney, 2011). In this type of white collar crime, a company or an individual, misrepresents information relied on by stockholders in making of their short and long term decisions on their projects.
When the information presented to stockholders is wrong, they end up trading huge losses. These persons and organizations may be banks (corporate or investment), brokerage companies and stockbrokers (Straney, 2011). When security scam is committed, stockholders makes sales and purchases based on uninformed decisions or because of forged details provided in the stock or product markets.
Additionally, unsophisticated investors with the possibility of not being able too adequately evaluate risks are those more at risk of engaging in uncertain investment opportunities and they eventually end up making huge losses. Security scam can also be in the form of absolute investor’s debt for instance, embezzlement of funds or misstatements of economic reports as well as offering false details to business auditors (Straney, 2011).
Stock and investment scam can also be committed by companies or persons withholding vital information or presenting false or non-informative details or advises to investors. Such crimes may also include committing accounting or financial fraud, filing false details to Securities and Exchange Commission, insider trading, and front running and manipulating stock prices (Baker et al., 2007).
The punishments for companies and individuals that commit securities fraud range from criminal to civil penalties attracting imprisonment and penalties (Kun, 2005). Many securities fraud victims are also old stockholders including those who are aged 50 years and above from their indirect or direct purchases via pension funds.
In many cases, investors are the victims, while in other cases, creditors, employees and tax establishments also fall victims. Officials who are dishonest in a company are mainly the perpetrators of the evil and more especially those that can easily access payrolls of staff members and other economic reports. With this information in mind, they will be in a position to understate liabilities and costs among overstating assets and revenues (Kun, 2005).
Types of Securities Fraud
Corporate fraud is carried out by top business officials who manipulate details cause stockholders huge losses. Enron is one of the companies that witnessed corporate fraud to a level that the US government announced and described the aggressive agenda to fight the crime. Corporate fraud has since early 2009 increased and presently, less publicized corporates commit the crime.
Some fraudsters additionally create an illusion of existing organizations and up misleading stockholders with dummy companies. Such fraudsters use same names as those of real companies in operation and trick investors into investing and purchasing shares from them. The investors think that they are working with real companies but end up with losses.
Insider trading can be running business with the company’s stock by individuals who are part of the company for example, directors, key company employees and other vital shareholders especially those with more than ten percent shares of the entire company (Straney, 2011). Even so, this is mainly legal but becomes an illegal act when it is used for fraud purposes and cause to losses to stockholders.
An insider can also commit securities fraud by using content on public information to buy or sell a security. Such people utilize non-public details after getting it during performance of the inside job at the company that is in many cases illegal.
The brokerages in the kind of fraud put a lot of pressure on their clients to sell via Telesales, in search of microcap schemes (Wang, 2005). Mainly these transactions are given to clients in a deceitful way with the purpose of benefiting the brokerage in disguise. Even though some come from brokerage companies that are licensed, many are not and they often engage in private placement as well as stock and supplies that do not exist by undisclosed agent.
Mutual Fund Fraud
Mutual fund fraud involves different scandals such as insiders misleading investors with details on short term trading (Wang, 2005). For example, mutual fund and brokerages companies may mislead their clients with details on when to trade as well as how they meet market timing. The case of SEC and the Bank of America Capital Management for instance, of offering secret provisions for their clients to permit them into short term operations are good examples of this crime.
Fraudsters engage in crimes online for instance creating pump and dump schemes on their victims via spam emails, chat rooms, internet boards and other forms held online. According to the Securities and Exchange Commissions, such criminals cause dramatic increase in prices on thinly traded stocks as well as non-existent stocks of the ‘‘pump’’ organizations. The fraudsters also generate a lot of profits from their stock holding and when prices fall, the clients realize that they have fallen victims of internet fraud.
Such fraudsters also use investment newsletters online with messages that appear impartial to highlighted companies. The information reaches target victims freely and the advertising stock settles for a specific time for instance a particular month. Corporate shares achieved at low prices are also traded at high prices (Straney, 2011).
Bulletin boards that contain fraudulent texts, scalping and phishing are also other forms of internet fraud that the conmen use on their victims to get huge profits in a short period of time.
Short Selling Abuses
This is a crime that involves giving of false details on stock in the company to stockholders and ultimately cutting down their prices thus, causing huge losses to stockholders (Straney, 2011).
This is an investment scheme that involves sponsored withdrawals by investors from the company instead of profit withdrawals generated from investment activities. This form of fraud causes huge monetary loss to the company.
Stock manipulators and promoters deceive small companies of fewer than two hundred million dollars as a way of promoting their stock and selling them to unsuspecting individuals. Micro cap crime costs investors one to three billion dollars yearly and mainly involve ‘’pump and dump’’ schemes as well as other internet fraud (Wang, 2005). Penny stocks are also prone to the crime and they are sold for five dollars per share.
Such stocks are traded thinly and later on, their prices are raised to generate more profits for their fraudsters. The fraudsters do this by buying more stock and offering misleading details that compose of affirmative statements on stock prices and later on increase their share prices.
The fraudsters also proceed to use internet chat rooms and emails to increase interest rates for unsuspecting clients. This also leads to increased number of companies and individuals purchasing their shares and incurring huge losses later on. The insider in such cases will also convince unwilling investors by informing them that they have inside details of impending news and trick investors to purchasing shares.
Pressure imposed on investors also persuade them into buying of stock but pushes their prices even further thus, creating hype in the stock business (Wang, 2005). Such hype convinces more clients into buying of shares based on the enticing information that makes them believe that it is a genuine and good deal. Victims however end up incurring massive losses and the scammers end up with huge profits from the products and stocks.
Recently, the artist 50 Cent benefited from 8.7 million dollars after selling shares worth thirty million of the business. Another example is the case involving LEXG where direct email was utilized to campaign over stock sales and it made more than three hundred and fifty million dollars from promotional claims.
This form of crime rose in early 2000 in the United States, where many big corporations offered false details over their corporate clients (Straney, 2011). In account scam, a company offers false financial details and ends up misleading investors in decision making process and it involves millions of cash (Straney, 2011). For instance in the United States, many big companies such as PricewaterhouseCoopers and Deloitte & Touché, have been involved in this form of crime among other companies.
Detection and Prevention of Securities Fraud
People should at all times be vigilant to take note of warning signs including a deal that sounds too good to be real, sellers using sales pressuring strategy and unsolicited offers or sellers that are looking for personal information (Baker et al.,2007). People should also ensure that claims made are true through the federal and state securities regulatory besides getting a copy of transactions carried out.
All identified and suspected fraudsters should also report promptly to Securities and Exchange Commission or the nearby 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. (304991037).