What is Securities Fraud and How to Avoid Them?

What-is-Securities-Fraud-and-How-to-Avoid-Them

It is the responsibility of each Canadian to deal with securities and regulate the market fairly. Several statutes, both federal and provincial control the sale and dealing of such securities. Although it differs from province to province and their security commissions, the basic rulings remain the same.

For example, in Ontario, the Ontario Securities Commission regulates such investments through proper enforcement of the Business Corporations Act, Commodity Futures Act and the Securities Act.

So, if you are someone who has recently bought or is planning to purchase securities, you need to know what security fraud is and how you can save yourself from future trouble.

What is Security Fraud?

Security fraud, also called stock fraud or investment fraud, is a violation of the securities laws. It deceptively induces investors and buyers to make investment decisions based on false or manipulated information, causing them to result in financial losses.

The capital market and the commodities market see the most security frauds happening. These unlawful strategies and practices take cover under misrepresentation to fool investors.

Who are the Fraudsters?

Investment advisors are the most common types of fraudsters in stock dealing. Stockbrokers are at a similar position when it comes to fooling less informed clients.

However, you may be cheated by an organization, such as a faulty brokerage firm, a lying investment bank or a misleading corporation. It can also happen through brokers or bankers pretending to be from reputed companies.

Types of Securities Frauds

Here are 5 types of securities fraud:

1. Misconduct of the registrant

Those who advise or trade-in long term or short term securities in Canada, be it a person or a corporation, need to be registered in the province under the Securities laws. They may then conduct their activities in the form of an investment banker/broker. But even a registered person may show misconduct.

These may happen due to violation of the securities law, due to failure to register or failure of adhering to exemption conditions. If any of these 3 occur while they deal with securities and their clients, they may be deemed frauds.

2. Distribution issues

If the sale of securities by a broker does not comply with the requirements of disclosure and the law relevant to trading, it may be termed as an illegal distribution according to the Canadian Securities Administrators. A common way through which this distribution occurs is called the Ponzi scheme.

In such a scheme, an investor who has purchased the security first receives a good sum for his investment. This prompts him to invest further. They are lured to get more money, but actually, the successful result and high return of this investor was backed by the investments of the later investors.

The first investors assume that they are winning, getting high returns from the sale of investments. When in reality their payments are fostered by what the later investors pay by this wicked scheme, not by any real profit whatsoever. So investors are investing in an open system, not backed by any asset or business.

3. Insider trading

This form of trading is more common. An insider of the business, who has access to confidential information that the public should not know, takes advantage of this privileged information to trade securities of the company.

The insider may use it for personal gain or help their family member, a friend or a third party to profit. Whoever receives the information other than the official, also then becomes an insider.

Securities fraud may happen when the insider uses this information to trade, while he was performing his responsibilities in the business or misappropriates it in any manner otherwise.

4. Fake corporations

The fraudster may falsely create a corporation that does not exist or creates an alias to an existing corporation. They may then trade on behalf of such corporations to investors who think they are buying securities of a real, actually non-existent, corporation.

5. Manipulation

Investors may manipulate the market share price, showing it as increased or decreased than the original to fool the investors. This is called a pump and dump scam. Here, false or misrepresented information travels through the internet via emails, forums and chats.

This carries the information that a stock price has drastically decreased and it will be one in a million opportunity to invest in such a stock when in reality, the fraudster owns a large portion of the capital.

When a lot of investors are lured into buying it, the price of the stock rises, called the pump phase. Once the price reaches a peak demand price, the fraudster sells the stock, called the dump phase, the value of the stock then dramatically reduces. But the fraudster meanwhile has had his gain while the investors suffer loss according to what they invested.

How to Avoid Them

To avoid security fraud:

  1. Deal only with individuals or firms registered in the province to conduct such businesses.
  2. Check the disciplinary history of who you purchase securities from.
  3. When you are promised unrealistic returns compared to the market, step back.
  4. If you are guaranteed high returns, know that there is no guarantee of investment, be it high or low.
  5. Don’t fall for securities chancing a limited time offers.
  6. Send checks to registered bodies only, not to any individual or irrelevant firms that you may be informed of.
  7. If you are pressurized to invest, that is a surefire reason not to do it.
  8. Ask for disclosure of documents before you invest.
  9. See the prospectus of the investment and check for blank documents.
  10. Ask them to explain sections, and if you don’t understand or aren’t satisfied, don’t invest there.

Also Read: what is 1st 2nd and 3rd degree murders

Conclusion

Many investors have this basic question of what securities fraud is. But before they know all the ins and outs, they already may have invested. To save yourself from such mishaps, make sure you read all documents and understand them before making any such investment in securities.

If you are told to lie about your income or see any red flags, chances are you will be trapped one time or another. So watch your step and consult a lawyer or known investors before you take the step.

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