Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws.
Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.
Securities fraud includes outright theft from investors and mis-statements on a public company's financial reports. The term also encompasses a wide range of other actions, including insider trading, front running and other illegal acts on the trading floor of a stock or commodity exchange.
According to the FBI, securities fraud includes false information on a company's financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.
The Securities and Exchange Commission (SEC) determine the requirements for securities fraud. SEC outlines these requirements under Section 10b-5 (Rule 10b-5) of the Securities Act of 1934. To commit securities fraud, all elements of Rule 10b-5 must be satisfied.
Securities fraud under Rule 10b-5 prohibits using "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of any security. Under this rule, one cannot deliberately try to deceive another when selling or purchasing securities.
Fraud Under Rule 10b-5
There are two ways to commit fraud under 10b-5:
• (1) Make an untrue statement (a lie);
• (2) Fail to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading (a half-truth, or not telling the whole story).
In order to commit securities fraud, the lie or half-truth must have been made in connection with the purchase or sale of securities. In other words, the lie or half-truth was made to induce someone to buy or sell securities. If someone is selling securities and he lied about his preference of sports teams, that is not securities fraud because it is immaterial to the purchase and sale of securities.
State of Mind
The person who lied or told a half-truth in connection with the purchase or sale of securities must have intended to defraud.
Causation and Loss
Lastly, the lie or half-truth must have caused the transaction (caused the victim to buy or sell stocks), and the victim must have suffered a loss as a result of this transaction.
for Serious Matters