Legal Definitions - Securities fraud

Securities fraud refers to deceptive practices in the stock or commodities markets that induce investors to make buying or selling decisions based on false information or the withholding of crucial facts. It involves intentionally misleading investors or manipulating financial markets for personal gain, often at the expense of unsuspecting individuals or institutions.

This type of fraud undermines the integrity of financial markets and can lead to significant financial losses for investors. It can involve various actions, such as:

• Making false statements about a company's financial health, products, or future prospects.
• Omitting important information that investors would need to make an informed decision.
• Using confidential, non-public information to trade stocks or other securities (known as insider trading).
• Manipulating stock prices through artificial trading activity.

Individuals and companies found guilty of securities fraud can face severe penalties, including substantial fines, imprisonment, and civil lawsuits from those who were defrauded.

Examples of Securities Fraud:

• Inflated Company Valuations: A startup technology company's CEO publicly announces a new, groundbreaking product feature that doesn't actually exist and significantly overstates the company's current user base and projected revenue in investor presentations. Based on these false claims, many new investors purchase shares in the company, driving up its stock price. When the truth about the non-existent feature and inflated numbers eventually comes out, the stock plummets, causing substantial losses for those investors.

  This illustrates securities fraud because the CEO made deliberate misrepresentations of material facts (non-existent product, inflated user base and revenue) to induce investors to buy the company's securities.

• Undisclosed Risks in an Investment Fund: The manager of a hedge fund promotes a new investment vehicle to clients, promising high returns with low risk. However, the manager intentionally fails to disclose that a significant portion of the fund's assets are invested in highly speculative, illiquid assets that carry a much greater risk of loss than advertised. When the market for these speculative assets collapses, the fund loses most of its value, and investors suffer heavy losses.

  This is an example of securities fraud through omission. The fund manager withheld critical information about the true risk profile of the investment, which was material to investors' decisions, thereby misleading them into investing.

• Insider Trading by an Executive: An executive at a major retail chain learns, before any public announcement, that the company's quarterly earnings report will show a much lower profit than analysts predicted, causing the stock price to likely drop significantly. Before the report is released, the executive sells all of their personal shares in the company and also tips off a close friend, who also sells their shares. When the poor earnings report is made public, the stock price indeed falls, but the executive and their friend avoided losses that other investors incurred.

  This demonstrates securities fraud through insider trading. The executive used confidential, non-public information (the poor earnings report) for personal financial gain and shared it with another, giving them an unfair advantage over the general investing public.