Legal News

19-Oct-2022

US Laws and Penalties: The Types Of Fraud Investigation

The world of business is cutthroat, and this is especially true when it comes to financial markets. There is a lot of money to be made, but there is also a lot of money to be lost. Unfortunately, there is no way to completely avoid risk when it comes to investing your money. However, there are some steps you can take to reduce your risk and improve your financial market results. One of the most important steps you can take is to educate yourself about the financial markets. The more you know, the better your investment results will be. In any market, companies are constantly looking for ways to gain a competitive advantage.

Unfortunately, sometimes the quest for a competitive edge leads to breaking the law. Fraudulent activities cost businesses billions of dollars every year, and regulators and investigators take these crimes very seriously. In this article, we’ll examine the various laws governing fraudulent activities in the business world. Specifically, we’ll look at laws regarding securities fraud, accounting fraud, insider trading, pyramid schemes, false advertising schemes, and wire fraud – all of which are codified under the US Code as violations of federal or state statutes. Additionally, we’ll also take a look at what consequences you might face if you’re convicted of violating one or more of these laws.

Securities Fraud

The first type of fraud we’re going to examine is securities fraud. Securities fraud occurs when someone makes a false statement to induce another person to buy or sell securities. Securities are any type of investment regulated by the SEC – this includes stocks, bonds, and other types of securities. Additionally, you can file a securities fraud case even if you weren’t the one deceived by the statement. For example, you could file a case if you purchased security from someone who was tricked into buying securities. What are some examples of securities fraud?

Pump and Dump Schemes: Pump and dump schemes are a form of securities fraud. In this scheme, a fraudster purchases a large number of shares of a low-value stock and then promotes the stock to drive up the price of the shares. The fraudster then quickly sells the shares for a large profit.

False Statements about Company Earnings: Another form of securities fraud is when a company makes a false statement about its earnings. For example, if a company reports earnings that are higher than they are, it’s committing securities fraud.

Accounting Fraud

Accounting fraud is when someone manipulates the accounting records of a company. This usually involves omitting certain information and/or inaccurately reporting information. Investors rely on financial statements to get a clear picture of the health of a company. If a company omits key information or misrepresents its financial standing, investors could lose a lot of money. In extreme cases, accounting fraud could cause a company to go out of business. What are some examples of accounting fraud?

Cooking the Books: Cooking the books is one example of accounting fraud. This occurs when a company records an inaccurate amount in a financial record. For example, a company might incorrectly record the amount of money it has in an account. 

Omitting Key Information: Omitting key information is another form of accounting fraud. This occurs when a company fails to disclose relevant information in its financial statements. For example, a company might fail to disclose that it has a large amount of debt.

Insider Trading

In simple terms, insider trading occurs when a person trades a security while in possession of material non-public information (MNPI). This type of information may include a pending acquisition, an earnings report, or any other type of event that could affect the stock price of the security. Due to the nature of the activities involved, insider trading is very hard to prove. Investigators often have to rely on circumstantial evidence and get lucky with their timing to make an arrest. What are some examples of insider trading? 

Trading on Material Non-Public Information: Trading on material non-public information is a classic example of insider trading. This occurs when an individual buys or sells securities based on information that is not available to the general public.

Inappropriate Exchanges of Information: Another form of insider trading is when someone inappropriately exchanges information with someone who has access to material non-public information. This could include something as simple as a security analyst sharing his earnings projections with a friend working in the company.

Pyramid Schemes

A pyramid scheme is a fraudulent business model that promises people high earnings while encouraging them to recruit others into the scheme. In reality, pyramid schemes only work when there are an excessive number of new participants. Once a pyramid scheme gets too large, it collapses under its weight. A pyramid scheme is a type of investment fraud. It’s illegal for companies to offer investment opportunities without being registered as a security. What are some examples of pyramid schemes?

Offering Unregistered Security: Offering unregistered security is one example of a pyramid scheme. This occurs when a company offers an investment opportunity without being registered as a security.

False Earnings Claims: Another form of a pyramid scheme is falsely claiming high earnings. A pyramid scheme will often claim that investors can get rich quickly by recruiting others into the scheme.

False Advertising and Marketing Scheme

Another type of fraud is false advertising and marketing schemes. In this scenario, a company advertises or offers products or services that don’t exist. For example, a company might promise to provide certain services but fail to deliver them when a customer attempts to use them. A false advertising scheme is a type of fraud that involves advertising a product or service that doesn’t exist. It can also involve deceiving customers about a product’s quality. False advertising causes billions of dollars in economic damage every year. What are some examples of false advertising and marketing schemes?

Falsely Advertised Products: Falsely advertised products are products that don’t exist. This could be as simple as a company offering a product that it has no intention of ever producing.

Falsely Advertised Services: Another form of false advertising is falsely advertising services. This could mean that a company makes promises to a customer that it doesn’t intend to keep.

Wire Fraud

Wire fraud is the use of a wire communication device, such as a telephone or internet connection, to obtain money or other property using false or fraudulent pretenses, representations, or promises. This is a very common form of fraud. The Federal Bureau of Investigation (FBI) estimates that more than $20 billion is lost to wire fraud each year. What are some examples of wire fraud?

Intentionally Misusing a Telecommunication Device: Intentionally misusing a telecommunications device is one example of wire fraud. This occurs when someone uses a wire communication device to obtain money or other property using false or fraudulent pretenses, representations, or promises.

Causing Someone to Falsely Promise to Pay: Causing someone to falsely promise to pay is another form of wire fraud. This occurs when a fraudster convinces a person to falsely promise to pay someone else money.

Conclusion

Fraud comes in many shapes and sizes. It’s important to note that not all fraudulent activities are illegal. For example, a company may try to overstate its earnings to boost its stock price. While this is unethical, it’s not necessarily illegal. The illegal types of fraud are called securities fraud, accounting fraud, insider trading, pyramid schemes, false advertising and marketing schemes, and wire fraud. These types of fraud cost billions of dollars every year, and regulators and investigators take these crimes very seriously. If you are ever accused of financial fraud, you will want to make sure that you are represented by an attorney who knows the laws and how to defend you in court. A qualified financial fraud lawyer can help you minimize the consequences of the charges against you and help you fight to obtain the best possible outcome in your case. If you’re convicted of violating one of these laws, you could face serious consequences.