Fraudulent activities can undermine the integrity of financial markets and harm investors. In the United States, the Securities and Exchange Commission (SEC) plays a crucial role in regulating and ensuring the fairness of the securities market.
For those involved with or investing in publicly traded companies, it’s vital to understand the different types of fraud that the SEC monitors and prosecutes. What might fraud look like in these companies?
Insider trading
When individuals with access to information about a company that is not available to the public use this information to make inform their investments, it is known as insider trading. For example, an employee may use their knowledge of upcoming company acquisitions to purchase stock before the price rises. Insider trading can significantly damage public trust in market fairness and transparency.
Misrepresentation and omission
The SEC insists that all information given to investors and the public must be complete and true to keep the market honest. Providing false information or omitting crucial details about the company’s financial status, business operations or risks in public disclosures are all serious issues. This misrepresentation can mislead investors and manipulate stock prices.
Accounting fraud
Accounting fraud occurs when a company changes its financial statements on purpose to make it look more successful than it really is. This might involve showing more revenue, showing less expense, or hiding debt. These actions can make investors make bad decisions based on wrong information, which can lead to financial losses.
Ponzi schemes
In a Ponzi scheme, a company pays new investors using the money from new investors. This type of scheme leads to an inevitable collapse when there are not enough new investors to cover payouts. The SEC actively works to identify and halt Ponzi schemes to protect investors.
Pump and dump schemes
In a pump and dump scheme, fraudsters increase a stock’s price through fake good news (the “pump”), then sell their own cheaply bought stock at the high price. After they sell their shares and stop promoting the stock, the price usually drops a lot, causing losses for other investors.
Market manipulation
Market manipulation involves actions designed to deceive investors by controlling or artificially affecting the market for securities. This can include tactics like wash trading (buying and selling stocks to create fake activity), spoofing (placing fake orders to change prices), and quote stuffing (quickly putting in and taking out a lot of orders to confuse others and manipulate stock prices). These dishonest practices can lead to prices that are not fair or competitive.
False or incomplete SEC filings
Publicly traded companies are required to provide reports to the SEC of all information necessary for potential investors to make decisions.
Understanding the various types of SEC fraud can help employees identify this wrongdoing and bring it to light. Employees willing to blow the whistle about SEC violations play a vital role in holding publicly traded companies accountable and ensuring the stability of financial markets.