Investment Monitoring: What is Securities Fraud?

Securities fraud is a general term used to describe various types of misconduct.  Most commonly, securities fraud takes place when an investor relies on false information that informs their investment decisions. Securities fraud is not always straightforward and easy to point out, as a wide range of illegal activities can be classified as securities fraud.  Some examples include insider trading, stock manipulation, corporate misconduct, Ponzi schemes, and other illegal acts. Often, this conduct is not a one-time occurrence by one bad actor, but a systematic and thoughtful scheme designed to benefit company insiders to the detriment of shareholders.

Some investors mistakenly believe that only shareholders with large investments can be a victim of securities fraud.  Unfortunately, this is not the case. Corporate wrongdoing can affect all shareholders regardless of the size of their portfolio. According to the NERA Economic Consulting Firm’s 2018 Class Action Statistics Report, investor losses reached $939 billion in 2018 and 1 in every 11 publicly-traded company was involved in a federal securities class action suit.

What to look out for: Types of Securities Fraud

  • Insider trading – taking advantage of confidential information to trade on the stock exchange to your benefit
  • Embezzlement – stealing from the company
  • Misstatements – knowingly providing false information to the public
  • Internet fraud – hiding information or providing false information in order to trick people out of money
  • Microcap fraud – securities fraud involving companies with a market capitalization under $250M
  • Accounting fraud – using false statements to make a company appear more profitable than its current revenue or assets actually substantiate
  • Boiler rooms – call centers with dishonest sales representatives selling information and/or stocks
  • Mutual fund fraud – when money pooled together from multiple people is switched and used in short term investments
  • Short selling abuses – when stock is sold without having been borrowed, which drives the stock price down
  • Ponzi schemes – similar to a pyramid scheme; investors are promised a high profit for a small investment, but the funds are actually used to pay earlier investors and the newest investors end up not getting paid
  • Dummy corporations – a company created as a front for another company, which is usually involved in some form of illegal action

Shareholders Have Rights

Whether you are new to the investment world or an experienced stockholder, shareholder rights are important to all those who invest in the stock market.

The most important right is the right to share in profitability. When you own shares of a company, you have the right to share in the income and assets of the company for as long as you own the stocks based on the amount of shares you own.

Though one of the most well-known, ownership of the company is not the only right that can affect investors and their stake in the company. Another important right that shareholders have is the right to vote on major issues.  Through voting, shareholders can influence management by electing a board of directors, which is a group of people that represent the opinions and concerns of shareholders, and have a say on fundamental changes to the company, such as mergers or liquidation.

Finally, shareholders can take legal action against a company when their rights have been affected by corporate wrongdoing. While a shareholder can do this as an individual, it more often takes the form of a class action lawsuit.   Shareholders can monitor the actions of the corporations’ officers, directors, and executives on their own, but that can take a lot of time, and most shareholders do not have access to specialized research tools or understand the implications of the information.  There are third party investment monitoring services that provide alerts to individuals and institutional investors to make sure they are aware of this information even if they decide not to take action against the corporations that violate shareholder rights.  In addition, shareholders should take advantage of the multitude of publicly available resources that can provide general information about their investments.

Yahoo Finance is a great tool for investors or those who are considering getting into the stock market because it provides real time information about the market, and news and press releases that can help investors make informed decisions and protect their assets.

Market Watch

Market Watch is useful to investors because it not only provides information and news regarding the market, but it allows you to customize the information that you see so you don’t have to browse through the whole site if you are only looking for information that is relevant to your investments.

Seeking Alpha

An informational resource that covers 8,000+ tickers and provides articles, market news, investing strategies, earning reports, transcripts, and filings.  Seeking Alpha is an excellent resource for investors is because it provides breaking news about stocks, along with an analysis and real time alerts on critical information.

Financial Industry Regulatory Authority (FINRA)

FINRA is dedicated to protecting investors via effective and efficient regulation of broker-dealers. Because they are authorized by Congress, they are able to protect investors by writing and enforcing rules, examining firms, fostering market transparency, and educating investors. FINRA is incredibly important when it comes to shareholder rights because their priority is to keep financial markets fair by enforcing high ethical standards at no cost to taxpayers.

U.S. Securities and Exchange Commission (SEC)

One of the largest and most official resources investors can use is the SEC. The goal of the SEC is to protect investors and maintain a fair market. The stock market is no longer only for seasoned investors on Wall Street, and that means the as more people decide to join the market, the SEC has to provide protection and resources to those that may need more help as they are just getting started. Since the SEC has enforcement authority, they can bring cases against companies for insider trading, accounting fraud, and providing misinformation.

Federal Communications Commission (FCC)

The FCC is responsible for regulating communications by radio, television, wire, and satellite in the United States. They help to regulate communications by conducting investigations and studying complaints, and they help with public safety and homeland security.

U.S. Department of Justice (DOJ)

The DOJ’s primary goal is to enforce the law and protect the interests of the United States. They are also responsible for keeping the public safe, punishing those that break the law, and ensuring justice for all. The DOJ is primarily concerned with hate crimes, heroin and opioid awareness, market integrity and consumer fraud, and intellectual property.

U.S. Food and Drug Administration (FDA)

The FDA is responsible for keeping the public safe by managing the production of human and veterinary drugs, biological products, medical devices, our nation’s food supply, cosmetics and products that emit radiation. They also oversee the production and marketing of tobacco products and reduce the use of tobacco by minors. One of the most important ways that the FDA keeps consumers safe is by helping the public get science-based information they need to use medical products and food.

How Robbins LLP Can Help

While the government entities mentioned above work vigilantly to protect shareholders, they are under-resourced and therefore, unable to effectively address all the corporate wrongdoing that fall under securities fraud.  That’s where private law firms come in.  Shareholder rights law firms often offer investment monitoring services through which they alert shareholders of securities fraud and provide advice on how shareholders can take legal action to protect their investments.

Our law firm, Robbins LLP, offers such a service – Stock Watch.  When you enroll in Stock Watch, you know that you have a team of researchers and litigators watching out for your investments and informing you when we identify corporate wrongdoing.  We will provide a recommendation and free legal advice so you can take action to correct the wrong, remove the executives from their positions, change policies to prevent future misconduct, and recover money for the corporation and yourself.  We will also provide you information about securities fraud class action settlements so you can stay apprised of your ability to recover settlement proceeds.

Having information at your fingertips is easier than ever. Enroll in Robbins LLP’s free investment monitoring service, Stock Watch, for notifications of corporate misconduct impacting the value of your investments, advice on how to hold corporate officers and directors accountable for their misconduct, and to receive information about class action settlements. 

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