What Is Securities Fraud? Meaning, Elements And Punishments – Forbes Advisor – Technologist

A security is an investment that you buy with the goal of profiting from outside events or someone else’s efforts or actions.

For example, stocks are securities. You purchase shares of stock in a company with hopes that the company will perform well and your shares will become more valuable, allowing you to make a profit.

Examples of securities include bonds, debentures, investment contracts, notes, oil and gas interests and stocks.

Engaging in dishonest securities-related behaviors is illegal on both the federal and state level. These behaviors may fall within the category of securities fraud crimes.

Legal Definition

Many types of behaviors are considered securities fraud. 18 U.S. Code § 1348 is one of the key federal statutes defining and prohibiting the crime.

Under 18 U.S. Code § 1348, it is illegal to knowingly execute, or attempt to execute, a “scheme or artifice” that is designed to do any of the following the following:

• defraud anyone in connection with a security registered under or required to file reports under the Securities and Exchange Act of 1934.
• defraud anyone in connection with any commodity that will be delivered in the future or any option to buy a commodity for future delivery.
• to use false or fraudulent pretenses, representations or promises to obtain money or property in connection with the purchase or sale of a commodity for future delivery, options to buy a commodity for future delivery or stocks registered under or required to file reports under the Securities and Exchange Act of 1934.

Meaning of Securities Fraud

While securities fraud is a complicated crime with many state and federal rules prohibiting specific types of behavior, the basic meaning is simple.

If an individual or an entity, such as a company or investment professional, is dishonest in connection with stocks, bonds or other investments to trick others, they have likely violated laws prohibiting various types of securities fraud.

Securities fraud is both a criminal offense and a civil wrong, which means that those who were defrauded can file a lawsuit in civil court to recover compensation for their losses.

Under the 10b-5 rule—promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934—the Securities and Exchange Commission could bring a criminal enforcement action, and an individual could file a private lawsuit against a defendant who, in connection with the purchase or sale of any security:

• employs devices, schemes or attempts to defraud.
• makes untrue statements of material facts or material omissions.
• engages in acts, practices or business that operates as a fraud or deceit.

In a civil action, the plaintiff would also have to show they were harmed due to the defendant’s misconduct.