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3 common forms of securities fraud

Securities are under strict regulation. It is illegal to manipulate financial markets and deceive investors. Securities fraud may involve:

  • Corporate stocks
  • Investment contracts
  • Banknotes
  • Municipal bonds

Securities fraud takes place if you are involved in an investment and use deception to try to gain a financial advantage. This type of fraud may be committed by corporations, brokers, financial analysts, government agencies and private individuals. Here are some common forms of investment fraud:

1. Third-party misrepresentation

Misrepresentation, also known as a "pump and dump" scheme, occurs when someone provides fake information about stocks. Consider this scenario: An individual finds a company that is just starting out that has cheap stock. This person purchases a lot of shares and spreads false statements about the company and encourages other people to buy shares. Once the price reaches a high point, the original investor sells the shares for a profit. 

2. Insider trading

Various types of people may come across confidential information about the financial state of a company. Employees, executives, accountants and financial analysts may learn of the financial struggles of a company before everyone else. For example, if someone finds out through private information that a corporation is going to declare bankruptcy, he or she may sell shares before telling the board and informing the public. 

3. Inaccurate reporting

Sometimes, a company itself commits securities fraud. When directors or officers of corporations do not report accurate financial information, it may lead to an artificial increase in the worth of those corporations. This misleads investors into buying shares that belong to an unhealthy company. 

It is crucial to be aware of all the laws and regulations relating to securities. If you are not careful, you may commit securities fraud without even realizing it. Knowing the different types of fraud and being informed of the law will prevent you from facing charges for this white-collar crime. 

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