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Saturday, May 19th

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SEC Fraud

What is SEC Fraud?

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Securities fraud  (SEC Fraud) is a practice where investors are induced into making purchases or sales decisions on the basis of false information. Securities fraud, also known as stock or investment fraud, typically results in the loss of finances and is in violation of United States securities laws. Usually, security fraud takes place within the stock and commodity markets.

Securities fraud can include false statements on the financial reports of public companies as well as outright theft from investors. The term covers a wide range of actions, including insider training, ponzi schemes and front running.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law.  As a result of the financial reform, the Act created whistleblower programs for both the SEC and the CFTC.

Whistleblower Rewards

New Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) whistleblower programs may provide for substantial rewards.
The new SEC whistleblower program, titled “Securities Whistleblower Incentives and Protection” is much broader than a predecessor SEC whistleblower program, which only provided awards for violations of insider trading. Now whistleblowers who report ANY securities law violations will receive a reward if the SEC and any other government authorities recover more than $1 million based on that information.

Likewise, the new CFTC whistleblower program, titled “Commodity Whistleblower Incentives and Protection” will provide whistleblowers with a reward if the SEC and any other government authorities recover more than $1 million based on that information of violations of the Commodity Exchange Act to the SEC.

The SEC and CFTC will adopt regulations about their respective whistleblower programs. However, below are several relevant aspects of the new whistleblower programs as provided in the Ac:

10 percent to 30 percent of the monies the SEC and other government authorities collect based on the whistleblower's information if more than $1 million is collected. The percentage of the reward is up to the discretion of the Commission taking into consideration the following:

  • The significance of the information provided;
  • The assistance provided by the whistleblower and the whistleblower's attorney;
  • The programmatic interest of the Commission in deterring violations of the securities law; and,

Additional relevant factors the Commission may establish by rule or regulation.

Types of SEC Fraud

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Internet Fraud

Sometimes referred to as pump-and-dump schemes, internet fraud often occurs in chat rooms, bulletin board, spam emails, and forums where false information is exchanged with the purpose of increasing the price in thinly traded stocks or stocks of shell companies.

When the price of the stock reaches a certain level, the offenders sell their stocks immediately. Those who innocently bought the stock become victims of fraud when the stock plummets.

Insider Trading

Illegal insider trading is when an insider trades based on information that is not public and was obtained either during the insider’s duties at the company or otherwise misappropriated. While the term “inside trading” has a negative connotation, there are actual legal forms of it, such as when corporate insiders buy and sell stock within their own companies.

Microcap Fraud

In microcap fraud, companies that are valued at under $250 million are fraudulently sold to the public. Often, these microcap fraud schemes involve penny stocks, which are defined at stocks that trade at less than $5 a share.

Accountant Fraud

Accountant fraud is when accountants neglect to identify and prevent the publication of false financial reports of their corporate clients in order to mislead the public about their clients’ financial status.

Boiler Rooms

A boiler room refers to centers of activity that engage in selling questionable goods via telephone. In boiler rooms, brokers can pressure clients into microcap schemes by offering clients fraudulent trades that benefit the brokers’ firm. Securities sold in boiler rooms include microcap stocks, private placements, and even non-existent stock.

Ponzi Schemes

A ponzi scheme is an investment fund where investors end up funding the withdrawals, rather than from actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.