Swindling the Investor

A Look into Securities Fraud

Editor’s note: This article is an excerpt from the Association’s Fraud Examiners Manual, Third Edition, Vol. 1. It is not meant to be a substitute for the study of the entire manual. In this issue, the article covers the discussion on “Securities Fraud,” pages 1.1501 to 1.1518.   

Black’s Law Dictionary defines securities as, “Stocks, bonds, notes, convertible debenture, warrants, or other documents that represent a share in a company or a debt owed by a company.” The reference also provides a method for determining whether an investment is a security:

Test for a “security” is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others so that whenever an investor relinquishes control over his funds and submits their control to another for the purpose and hopeful expectation of deriving profits therefrom he is in fact investing his funds in a security. 

According to the Securities Act of 1933, investors have a right to information concerning securities for public sale. This act prohibits misrepresentations and omissions of material facts, which any reasonable investor would rely upon when deciding on an investment. These facts include the track record of the proposed company, management, competition, profits, and debts. Therefore, securities fraud may thus be defined as employing any device, scheme, or artifice to defraud. It can include Pyramid schemes, Ponzi schemes, advance fee loan schemes, and many others.

International securities fraud is becoming more prevalent as the changing global economy presents increasing overseas investment opportunities. And while the internet provides a new arena for fraud, the scam on the web are the same that have been foisted upon investors for centuries, but now are presented in a high-tech package.

It’s the Rule 

Under the Investment Company Act of 1940, investment companies are required to register with the Securities and Exchange Commission (SEC), which also regulates their activities. (See the end of this article). This act dictates qualifications for officers and directors, requires that certain matters are submitted for stockholder approval, and mandates SEC permission for certain transactions such as those between insiders and affiliates.




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