Securities fraud, also known as investor or stock fraud, covers a range of activities that violate federal and state laws pertaining to buying, selling and trading securities. The most common forms of securities fraud include:
•Misrepresentation (presenting misleading or false information to investors about a company, or its securities)
•Accounting fraud (manipulating or falsifying books or records to misrepresent a public companies assets and liabilities)
•Insider trading (buying, selling or trading securities based on information that is not readily available to the general public)
Securities fraud is governed by both federal and state laws, and legal actions can be brought about by private investors or by a government agency, such as the U.S. Securities and Exchange Commission. Violations of federal securities laws are treated as serious offenses that can carry both civil and criminal penalties. Criminal investigations can lead to felony convictions that carry penalties of up to 20 years' imprisonment. In addition, the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) may impose civil fines against corporations or individuals convicted of securities fraud.
Federal Regulations
While state laws vary, federal securities laws include the Securities Act of 1933, which addresses the issuance of securities by companies, and the Securities Exchange Act of 1934, which governs the trading, purchase and sale of securities. These laws authorize a government agency, the Securities and Exchange Commission (SEC), to monitor the industry and to issue further regulatory controls. Other federal laws, like the Private Securities Litigation Reform Act and the Sarbanes-Oxley Act of 2002 also impact the securities industry and serve as a basis for claims related to securities fraud.
At the federal level, the SOX also establishes federal penalties for violations of laws pertaining to the buying, selling and trading of securities. Section 802 (a) of the SOX states:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
Section 1107 of the SOX provides legal protection for those who report situations that may involve securities fraud. It states:
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both.
