The Evil of Securities Fraud

Posted by in Financial Crime on Apr 29, 2019

Everyone agrees that pyramid schemes are unethical and unfair. While some people disagree on what constitutes a pyramid scheme, people who commit actions like those of Bernie Madoff are almost unequivocally condemned. The reason being is empathy: no one wants to be the person that sank their money into a plan or idea on false pretenses.

Less prevalent, though, is disgust for securities fraud. That simply needs to change. Securities fraud is a crime just the same as a pyramid scheme however fewer people know what constitutes securities fraud or why it is so morally abhorrent.

For a better understanding of securities fraud, I turned to the website for an Alabama law firm, Hare, Wynn, Newell & Newton, LLP. On their site, they define securities fraud as a crime that takes place when the “Know Your Customer” rule. The rule requires stockbrokers and brokerage firms to keep customers’ goals, risk ability, and available assets when trading on their behalf.

This rule can be broken in a few different ways. If a stockbroker trades without their client’s permission, that could constitute securities fraud. Especially if the trade overtly benefits the stockbroker or is riskier than the client would normally want.

Another instance of potential securities fraud would be when a stockbroker doesn’t disclose necessary information to a potential purchaser of a stock. For example, if a person does not disclose that they stand to benefit — from, perhaps, owning a company or being on a company’s board — if the potential purchaser invests in the stock. This is not only wrong but may also be illegal!

Based on stereotypes from movies like “Wall Street” or “The Wolf of Wall Street,” people who work in the financial world are sometimes seen as greedy or immoral. I don’t think that’s always true. I know a few people who work in banks and even a few people that used to work as investors, and they are great people.

But I can see how crimes like securities fraud perpetuate stereotypes about investors and finance workers.

I was pretty fascinated by the description of potential securities fraud crimes, especially ones that I had never heard of. According to the Hare, Wynn, Newell & Newton, LLP website, investors have to work with the Securities Exchange Commission (SEC) pretty frequently; the SEC is the agency with direct oversight on stocks/investment interactions.

If a person does not disclose certain information to the SEC about their finances or potential conflicts of interest, their actions could constitute securities fraud. However, I learned about a crime I had never even considered.

Some people commit securities fraud by selling or investing in securities (basically, a mechanism or document with financial value like a stock or bond) that are not registered with the SEC. I cannot imagine being so bold as to sell stocks without registering them — seems obvious that at some point, you’ll get caught.

The process was super fascinating, if not a little disappointing. Finding out that there are so many common ways that people break the law is a tad saddening. However, knowing that there are excellent lawyers available to represent people who may have been taken advantage of made me happy.

Leave a Reply

Your email address will not be published. Required fields are marked *