Securities fraud

From Wikipedia, the free encyclopedia

This article does not cite any references or sources. (July 2007)
Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed.

Securities fraud, also known as investment fraud, is a practice where investors are deceived and manipulated, resulting in theft.^[1] The elements of the crime are theft of capital from investors and defrauding the accounting companies about a corporation's financial reports.

This white collar crime has become increasingly frequent as the Internet and the World Wide Web have given white collar criminals greater access to their intended victims. The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants. Securities regulators and other prominent groups have estimated that civil securities fraud totals approximately $40 billion per year. Fraudulent schemes perpetrated in the securities and commodities markets can ultimately have a devastating impact on the viability and operation of those these markets.

1 Increase of securities fraud
2 Asset recovery
3 Potential victims
4 Potential perpetrators
5 Other effects of securities fraud
6 Related subjects
7 See also
8 References

[edit] Increase of securities fraud

Securities fraud is becoming more complex as the industry develops more complicated investment vehicles in an effort to obtain higher rates of return. In addition, white collar criminals are expanding the scope of their fraud and are looking outside the United States for new markets, new investors to defraud, and banking secrecy havens to hide their unjust enrichment. The securities industry is one of the most critical and influential industries in the country and is regulated by the SEC.

A study conducted by the New York Stock Exchange in the mid-1990s revealed that approximately 51.4 million individuals owned some type of traded stock, and an additional 200 million individuals owned securities indirectly. These same financial markets provide the opportunity for wealth to be obtained and the opportunity for white collar criminals to take advantage of unwary investors who desire to make honest income and to not be swindled.

[edit] Asset recovery

Recovery of assets from the proceeds of securities fraud is a resource intensive and expensive undertaking because of the cleverness of fraudsters in concealment of assets and money laundering, as well as the tendency of many criminals to be profligate spenders. A victim of securities fraud is usually fortunate to recover any monies from the defrauder.

[edit] Potential victims

Any investor can become a victim of this crime, but persons aged 50 years or older are most often victimized by securities fraud, whether as direct purchasers in securities or indirect purchasers through pension funds. Not only do investors lose: so can creditors, taxing authorities, and innocent employees.

[edit] Potential perpetrators

Potential perpetrators of securities fraud within a publicly-traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to:

overstate assets
overstate revenues
understate costs
understate liabilities

Enron Corporation exemplifies all four tendencies, and its failure demonstrates the extreme dangers of a culture of corruption within a publicly-traded corporation. The rarity of such spectacular failures of a corporation from securities fraud attests to the general reliability of most executives and boards of large corporations. Most spectacular failures of publicly-traded companies result from such innocent causes as marketing blunders (Schlitz), an obsolete model of business (Penn Central, Woolworth's), inadequate market share (Studebaker), or non-criminal incompetence (Braniff).

[edit] Other effects of securities fraud

Even if the effect of securities fraud is not enough to cause bankruptcy, a lesser level can wipe out holders of common stock because of the leverage of value of shares upon the difference between assets and liabilities. Such fraud has been known as watered stock, analogous to the practice of force-feeding livestock great amounts of water to inflate their weight before sale to dealers.