Thousands of people each year fall victim to fraudulent acts -- often unknowingly. While many instances of fraud go undetected, learning how to spot the warning signs early on may help save you time and money in the long run.
Fraud is a broad term that refers to a variety of offenses involving dishonesty or "fraudulent acts". In essence, fraud is the intentional deception of a person or entity by another made for monetary or personal gain.
Fraud offenses always include some sort of false statement, misrepresentation, or deceitful conduct. The main purpose of fraud is to gain something of value (usually money or property) by misleading or deceiving someone into thinking something which the fraud perpetrator knows to be false. While not every instance of dishonesty is fraud, knowing the warning signs may help stop someone from gaining any unfair advantage over your personal, financial, or business affairs.
What the Law Says About FraudLaws against fraud vary from state to state, and can be criminal or civil in nature. Criminal fraud requires criminal intent on the part of the perpetrator, and is punishable by fines or imprisonment. Civil fraud, on the other hand, applies more broadly to circumstances where bad-faith is usually involved, and where the penalties are meant to punish the perpetrator and put the victim back in the same position before the fraud took place.
While the exact wording of fraud charges varies among state and federal laws. the essential elements needed to prove a fraud claim in general include: (1) a misrepresentation of a material fact; (2) by a person or entity who knows or believes it to be false; (3) to a person or entity who justifiably relies on the misrepresentation; and (4) actual injury or loss resulting from his or her reliance.
Most states require that each element be proven with "particularity" -- meaning that each and every element must be separately proven for a fraud charge to stand.
Types of FraudThere are many types of fraud offenses, several of which occur through the mail, internet, phone, or by wire. Common types include:
■ bankruptcy fraud
■ tax fraud (a.k.a. tax evasion)
■ Identity theft
■ insurance fraud
■ mail fraud
■ credit/debit card fraud
■ securities fraud
■ telemarketing fraud
■ wire fraud
Warnings Signs of Fraud -- What to Look Out For
The warnings signs vary depending on the type of attempted fraud. For example, a warning sign for telemarketing fraud may include a phone call by an unknown caller asking you to "send money now" to receive an offer. Similarly, a warning sign for identity theft might be a call from someone asking for the digits of your social security number or last known address.
■ bankruptcy fraud
■ tax fraud (a.k.a. tax evasion)
■ Identity theft
■ insurance fraud
■ mail fraud
■ credit/debit card fraud
■ securities fraud
■ telemarketing fraud
■ wire fraud
Warnings Signs of Fraud -- What to Look Out For
The warnings signs vary depending on the type of attempted fraud. For example, a warning sign for telemarketing fraud may include a phone call by an unknown caller asking you to "send money now" to receive an offer. Similarly, a warning sign for identity theft might be a call from someone asking for the digits of your social security number or last known address.
Other, more general, warning signs may include, receiving unsolicited mail requesting you to send money to a bogus account, losing your credit card or driver's license, and promises made by an individual or company that seem "too good to be true".
The practice of fraud is not always geared toward individuals. Business owners also need to look out for fraud perpetrators. Landlords, loan agents, and other small business owners should also be aware of potential warning signs, such as phony references, wrong phone numbers or address on applications, large purchases on bank card without regard to price, style of item, and so on. The golden rule in preventing potential fraud offenses is to be vigilant in handling your business and personal affairs.
Penalties for Fraud Offenses
Penalties for fraud offenses may include criminal penalties, civil penalties, or both. Most criminal fraud offenses are considered felony crimes and are punishable by jail, fines, probation, or all of the above. Civil penalties may include restitution (paying the person back) or payment of substantial fines (geared to punish the behavior). The penalties for your offense will depend on the nature, type, scope, and severity of the action and whether it was committed by an individual or an entity, such as a business, corporation or group.
Penalties for fraud offenses may include criminal penalties, civil penalties, or both. Most criminal fraud offenses are considered felony crimes and are punishable by jail, fines, probation, or all of the above. Civil penalties may include restitution (paying the person back) or payment of substantial fines (geared to punish the behavior). The penalties for your offense will depend on the nature, type, scope, and severity of the action and whether it was committed by an individual or an entity, such as a business, corporation or group.
What to Do If You Believe You Are a Victim of Fraud
Fraud does not discriminate. Any person, group, business, government, or entity can fall victim to fraud offenses. Oftentimes, fraud victims face a range of emotions, including anger and betrayal toward the perpetrator, shame or guilt, and/or fear and frustration over the loss of money or something of value. If you believe you are a victim of fraud, there are several national and local fraud victims' assistance organizations that may help you.
In many cases, fraud victims do not recover the actual money or property that was lost. However, if you would like to prevent identity theft, and other common fraud violations, you may need to hire a lawyer who knows about the nuances of the laws concerning fraud in your state.
Fraud does not discriminate. Any person, group, business, government, or entity can fall victim to fraud offenses. Oftentimes, fraud victims face a range of emotions, including anger and betrayal toward the perpetrator, shame or guilt, and/or fear and frustration over the loss of money or something of value. If you believe you are a victim of fraud, there are several national and local fraud victims' assistance organizations that may help you.
In many cases, fraud victims do not recover the actual money or property that was lost. However, if you would like to prevent identity theft, and other common fraud violations, you may need to hire a lawyer who knows about the nuances of the laws concerning fraud in your state.
Tax Fraud and Crimes
What exactly is tax fraud? Although the need to file a tax return is referred to as “voluntary compliance” – individuals must know the laws and must file when required to do so. Tax Fraud occurs when individuals working and earning income knowingly and intentionally fail to file their income tax return or falsify information on a tax return.
Failing to state the correct amount of earned income, overstating deductions and exemptions and falsifying documents are all possible elements of tax fraud and are punishable in both criminal and civil jurisdictions.
What exactly is tax fraud? Although the need to file a tax return is referred to as “voluntary compliance” – individuals must know the laws and must file when required to do so. Tax Fraud occurs when individuals working and earning income knowingly and intentionally fail to file their income tax return or falsify information on a tax return.
Failing to state the correct amount of earned income, overstating deductions and exemptions and falsifying documents are all possible elements of tax fraud and are punishable in both criminal and civil jurisdictions.
The process of concealing or transferring income and reporting personal expenses as business expenses are also examples of tax fraud and are actual violations of the law.
How IRS Criminal Investigations Work
IRS Criminal Investigations ("CI") is the law enforcement branch of the IRS. CI’s are conducted for American taxpayers who willfully, knowingly and intentionally violate their legal requirement to file their tax returns and pay their taxes every year.
The General Tax Fraud Program is the largest Criminal Investigation enforcement program within the IRS. The General Tax Fraud Program encompasses CI’s ranging from tax evasion to money laundering crimes.
CI’s are conducted for individuals and business across all industries and locations within the United States. Of the CI’s completed, General Tax Fraud cases require the most substantial amount of CI's resources and investigation efforts to ensure taxpayer compliance with IRS rules and regulations.
Criminal investigations look at the stated amount of income, place and duration of stated employment, and payment of excise taxes.
The General Tax Fraud Program is the largest Criminal Investigation enforcement program within the IRS. The General Tax Fraud Program encompasses CI’s ranging from tax evasion to money laundering crimes.
CI’s are conducted for individuals and business across all industries and locations within the United States. Of the CI’s completed, General Tax Fraud cases require the most substantial amount of CI's resources and investigation efforts to ensure taxpayer compliance with IRS rules and regulations.
Criminal investigations look at the stated amount of income, place and duration of stated employment, and payment of excise taxes.
Tax Crimes and IRS Charges
Criminal Investigations can charge individuals with a number of crimes, all of which fall into four major crime categories:
•Legal Source Tax Crimes
•Illegal Source Financial Crimes
•Narcotics-Related Financial Crimes
•Counterterrorism Financing
Many of the crimes within the jurisdiction of CI have criminal and civil liabilities attached. Crimes that individuals can be charged with include (but are not limited to):
•Tax Evasion
•Attempt to Defeat Tax
•Tax Evasion Avoidance/li>
•Additional Tax Due
•Willful Failure to Pay
•Willful Failure to Keep Records
•Fraudulent Statement to Employer, etc.
What Happens When the IRS Catches Offenders?
If an individual is caught cheating on their taxes, they will have to deal with the civil and possible criminal consequences. Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding, and unlike criminal penalties, civil penalties can accrue indefinitely.
Criminal Investigations can charge individuals with a number of crimes, all of which fall into four major crime categories:
•Legal Source Tax Crimes
•Illegal Source Financial Crimes
•Narcotics-Related Financial Crimes
•Counterterrorism Financing
Many of the crimes within the jurisdiction of CI have criminal and civil liabilities attached. Crimes that individuals can be charged with include (but are not limited to):
•Tax Evasion
•Attempt to Defeat Tax
•Tax Evasion Avoidance/li>
•Additional Tax Due
•Willful Failure to Pay
•Willful Failure to Keep Records
•Fraudulent Statement to Employer, etc.
What Happens When the IRS Catches Offenders?
If an individual is caught cheating on their taxes, they will have to deal with the civil and possible criminal consequences. Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding, and unlike criminal penalties, civil penalties can accrue indefinitely.
Individuals who under-report their income by 25% or more are within the fraud provisions of the IRS rules, and as such, the IRS will be able to go back for 6 years (as opposed to the normal 3-year statute of limitations) to charge the individual with an underpayment tax penalty.
If the IRS substantiates a claim of willful intent to evade paying taxes, they could go back as far as they wish, without any limitation and assess penalties, fines and interest on all unpaid taxes from the beginning of the taxpayers adult life
How Tax Crime Prosecutions Should be HandledIndividual taxpayers being prosecuted for tax evasion penalties and crimes should immediately seek the assistance of an experienced tax attorney who can help them understand the severity of the charges and available options.
Often times, an agreement can be reached out of court that allows the individual to pay fines and penalties in lieu of going to jail.
Tax Crime ConvictionsIf attempts to reach a plea bargain fail and the case goes to trial, there is a substantial likelihood that those charged with significant tax crimes will end up serving jail time.
Federal Sentencing Guidelines establish the length of time for convicted tax criminals, but many in-court and out-of-court factors may also play a part in determining the punishment upon conviction.
Penalties for Tax Fraud and EvasionConsequences for not filing a tax return can include both criminal and civil penalties.
Penalties for Tax Fraud and EvasionConsequences for not filing a tax return can include both criminal and civil penalties.
Criminal Consequences: Criminal charges may be brought against an individual within six years of the date that the tax return should have been filed. Additionally, non-filers can be fined up to $25,000 per year and may also be put in prison for one year for each year of non-filing.
Civil Consequences: Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding. While criminal consequences are limited to 6 years, civil penalties can accrue indefinitely.
Civil Consequences: Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding. While criminal consequences are limited to 6 years, civil penalties can accrue indefinitely.
Tax Evasion
In the United States, tax evasion means illegally avoiding a tax assessment or payment. This should not be confused with tax avoidance, which refers to using current tax laws to legally reduce the amount of tax payable. While tax avoidance is legal, tax evasion is not. The U.S. Government estimates that criminal tax evasion amounted to $345 billion, or roughly 14 percent of federal revenues, in fiscal year 2007.
Tax evasion can take many forms. Usually it involved individuals or corporations either not filing taxes or misrepresenting the amount they owe to the Internal Revenue Service (irs tax evasion). Misrepresentation can result from:
•Failing to file tax returns
•Failing to report cash income or underreporting total income
•Overstating or taking unauthorized deductions
•Inflating or falsely claiming charitable donations
•Omitting property or underreporting the value of an estate
According to the Internal Revenue Service, people who acquire money through illegal activities—including gambling, drug trafficking or theft—are required to report these profits as income. Often, they do not because this would be an admission of guilt that could result in criminal charges. Individuals who try to report these profits as income from legitimate sources can face charges for money laundering. Suspected criminals, such as Al Capone, have sometimes been successfully prosecuted for tax evasion when there was insufficient evidence to convict them of other crimes. Similarly, tax evasion can be added to charges for other crimes where the person arrested has earned illegal income.
In the United States, tax evasion means illegally avoiding a tax assessment or payment. This should not be confused with tax avoidance, which refers to using current tax laws to legally reduce the amount of tax payable. While tax avoidance is legal, tax evasion is not. The U.S. Government estimates that criminal tax evasion amounted to $345 billion, or roughly 14 percent of federal revenues, in fiscal year 2007.
Tax evasion can take many forms. Usually it involved individuals or corporations either not filing taxes or misrepresenting the amount they owe to the Internal Revenue Service (irs tax evasion). Misrepresentation can result from:
•Failing to file tax returns
•Failing to report cash income or underreporting total income
•Overstating or taking unauthorized deductions
•Inflating or falsely claiming charitable donations
•Omitting property or underreporting the value of an estate
According to the Internal Revenue Service, people who acquire money through illegal activities—including gambling, drug trafficking or theft—are required to report these profits as income. Often, they do not because this would be an admission of guilt that could result in criminal charges. Individuals who try to report these profits as income from legitimate sources can face charges for money laundering. Suspected criminals, such as Al Capone, have sometimes been successfully prosecuted for tax evasion when there was insufficient evidence to convict them of other crimes. Similarly, tax evasion can be added to charges for other crimes where the person arrested has earned illegal income.
Common Types of Tax Evasion
Most often, however, tax evasion applies to individuals who have not filed their tax returns accurately and on time. According to the U.S. government, approximately 3 percent of taxpayers do not file tax returns at all. Civil penalties for willful failure to file tax returns in a timely manner are based on the amount of tax actually owed. Therefore, if no tax is owed, no penalties are due. However, tax evasion is also a criminal matter. Thus, the taxpayer can also be sentenced to one year in prison for each year he or she willfully did not file a tax return. While there is a six year statute of limitations on federal tax crimes, there is no statute of limitations for civil actions, such as demands for taxes owed, for years in which no return has been filed.
Most often, however, tax evasion applies to individuals who have not filed their tax returns accurately and on time. According to the U.S. government, approximately 3 percent of taxpayers do not file tax returns at all. Civil penalties for willful failure to file tax returns in a timely manner are based on the amount of tax actually owed. Therefore, if no tax is owed, no penalties are due. However, tax evasion is also a criminal matter. Thus, the taxpayer can also be sentenced to one year in prison for each year he or she willfully did not file a tax return. While there is a six year statute of limitations on federal tax crimes, there is no statute of limitations for civil actions, such as demands for taxes owed, for years in which no return has been filed.
Penalties
Tax evasion constitutes a crime that may give rise to substantial civil penalties, imprisonment, or both. Section 7201 of the Internal Revenue Code states, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Tax evasion constitutes a crime that may give rise to substantial civil penalties, imprisonment, or both. Section 7201 of the Internal Revenue Code states, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Proof of the crime requires demonstrating beyond a reasonable doubt that the individual or corporation concerned had substantial tax liabilities, as a result of not filing or unreporting, and that the individual or corporation both knowingly and willingly attempted to evade the tax.
Facts About Securities and Investment FraudWant to pay off your house faster? Want to pay for your child’s escalating tuition fees? Then the stock market is the best way to make sure you can pay for all those things. And as your investment starts to grow, you might even be able to afford to save for other things like an early retirement. But be careful who you deal with. Slick brokers are out there thinking of ways to take your money away from you for good. That’s why experienced securities fraud attorneys are ready to take your case and get your money back.
Cheated by a disreputable broker?As more and more first-time investors head to the market, more people are trying to take advantage. Securities fraud is most often carried out by: brokers, dealers, company executives, and financial advisors. Since these people are on the inside of the system, the problem can be huge. That’s why the Securities and Exchange Commission was set up to enforce the laws set up by the Securities Act of 1933. People found guilty of defrauding investors can face huge fines and long prison terms.
Cheated by a disreputable broker?As more and more first-time investors head to the market, more people are trying to take advantage. Securities fraud is most often carried out by: brokers, dealers, company executives, and financial advisors. Since these people are on the inside of the system, the problem can be huge. That’s why the Securities and Exchange Commission was set up to enforce the laws set up by the Securities Act of 1933. People found guilty of defrauding investors can face huge fines and long prison terms.
Investment fraud can afflict anybody who puts his or her faith in a financial professional, broker, or investment banker. When it comes to investing your hard-earned money, a financial professional can help you sort out stocks and bonds possibilities as well as mutual fund interests, and all your investment needs.
Investment Fraud occurs when these trusted individuals illegally profit from your investment money. Investment fraud is also a part of securities fraud. Securities is regulated by the federal Securities and Exchange Commission (SEC). The SEC investigates all investment and securities fraud allegations and delivers this information to state or federal prosecutors so that the perpetrators of these crimes can be penalized.
The Securities Act of 1933, often referred to as the "truth in securities" law, was issued to administer and regulate securities. The Securities Act of 1933 has two basic objectives:
•Require that investors receive financial and other significant information concerning securities being offered for public sale
•Prohibit deceit, misrepresentations, and other fraud in the sale of securities
If you’ve been cheated by a dishonest broker or have fallen for a get rich quick scheme, don’t be ashamed. Thousands of people are tricked each year. With the help of a securities fraud attorney, you can sue the con artists in court and get your money back.
Securities Fraud Hot Topics
•Stock manipulation
•Insider Trading
•Churning
•Late Trading Schemes
•Investment fraud
•Stock fraud
•Internet fraud
•Mutual fund fraud
•Accounting fraud
Securities Sold in the U.S. Must Be Registered
The registration forms companies file with the Securities and Exchange Commission provide essential facts while minimizing the burden and expense of complying with the law.
•Require that investors receive financial and other significant information concerning securities being offered for public sale
•Prohibit deceit, misrepresentations, and other fraud in the sale of securities
If you’ve been cheated by a dishonest broker or have fallen for a get rich quick scheme, don’t be ashamed. Thousands of people are tricked each year. With the help of a securities fraud attorney, you can sue the con artists in court and get your money back.
Securities Fraud Hot Topics
•Stock manipulation
•Insider Trading
•Churning
•Late Trading Schemes
•Investment fraud
•Stock fraud
•Internet fraud
•Mutual fund fraud
•Accounting fraud
Securities Sold in the U.S. Must Be Registered
The registration forms companies file with the Securities and Exchange Commission provide essential facts while minimizing the burden and expense of complying with the law.
Penalties of Securities FraudSecurities fraud, also known as investor or stock fraud, covers a range of activities that violate federal and state laws pertaining to buying, selling and trading securities. The most common forms of securities fraud include:
•Misrepresentation (presenting misleading or false information to investors about a company, or its securities)
•Accounting fraud (manipulating or falsifying books or records to misrepresent a public companies assets and liabilities)
•Insider trading (buying, selling or trading securities based on information that is not readily available to the general public)
Securities fraud is governed by both federal and state laws, and legal actions can be brought about by private investors or by a government agency, such as the U.S. Securities and Exchange Commission. Violations of federal securities laws are treated as serious offenses that can carry both civil and criminal penalties. Criminal investigations can lead to felony convictions that carry penalties of up to 20 years' imprisonment. In addition, the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) may impose civil fines against corporations or individuals convicted of securities fraud.
•Misrepresentation (presenting misleading or false information to investors about a company, or its securities)
•Accounting fraud (manipulating or falsifying books or records to misrepresent a public companies assets and liabilities)
•Insider trading (buying, selling or trading securities based on information that is not readily available to the general public)
Securities fraud is governed by both federal and state laws, and legal actions can be brought about by private investors or by a government agency, such as the U.S. Securities and Exchange Commission. Violations of federal securities laws are treated as serious offenses that can carry both civil and criminal penalties. Criminal investigations can lead to felony convictions that carry penalties of up to 20 years' imprisonment. In addition, the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) may impose civil fines against corporations or individuals convicted of securities fraud.
Federal Regulations
While state laws vary, federal securities laws include the Securities Act of 1933, which addresses the issuance of securities by companies, and the Securities Exchange Act of 1934, which governs the trading, purchase and sale of securities. These laws authorize a government agency, the Securities and Exchange Commission (SEC), to monitor the industry and to issue further regulatory controls. Other federal laws, like the Private Securities Litigation Reform Act and the Sarbanes-Oxley Act of 2002 also impact the securities industry and serve as a basis for claims related to securities fraud.
While state laws vary, federal securities laws include the Securities Act of 1933, which addresses the issuance of securities by companies, and the Securities Exchange Act of 1934, which governs the trading, purchase and sale of securities. These laws authorize a government agency, the Securities and Exchange Commission (SEC), to monitor the industry and to issue further regulatory controls. Other federal laws, like the Private Securities Litigation Reform Act and the Sarbanes-Oxley Act of 2002 also impact the securities industry and serve as a basis for claims related to securities fraud.
The Sarbanes-Oxley Act (SOX) was enacted by the U.S. federal government in 2002 in response to a number of major corporate scandals involving securities fraud, including those related to Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals cost investors billions of dollars when the share prices of the affected companies collapsed and shook public confidence in U.S. securities markets. The act contains 11 titles, or sections, which promote enhanced standards for all U.S. public companies as well as for the activities of company boards, management, and public accounting firms.
At the federal level, the SOX also establishes federal penalties for violations of laws pertaining to the buying, selling and trading of securities. Section 802 (a) of the SOX states:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
Section 1107 of the SOX provides legal protection for those who report situations that may involve securities fraud. It states: Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both.
Securities Fraud LawsIn the current economic climate, everyone has an interest in maintaining fair, orderly and efficient markets that can help individuals secure a stable future, pay for their homes, and send their children to college.
Securities fraud, also known as stock or investment fraud, consists of deceptive practices related to the offer or sales of securities. Fraud can result if a stockbroker or financial analyst purposely gives misleading advice, omits vital information, or fails to fully explain the risks associated with an investment decision. Violations of U.S. laws can also occur when publicly traded companies misrepresent their assets or liabilities or when individuals use special “insider” knowledge not available to the general public for their own benefit. The Association of Certified Fraud Examiners estimates that U.S. companies lost an estimated $652 million to fraud in 2006.
Basic Securities LawsThe functioning of securities markets in the United States is governed primarily by the Securities Act of 1934, often referred to as “the truth in securities law.” This law seeks to ensure that investors receive full and accurate financial and other significant information about investment opportunities offered to the public and to prohibit deceit, misrepresentations, and other fraud in the sale of securities.
An agency of the U.S. government, the Securities and Exchange Commission (SEC) is charged with monitoring the securities market and regulating securities fraud. Individual states also regulate securities markets through state securities commissioners.
Protecting against securities fraud primarily relates to the activities of stock brokers, financial advisors and analysts as well as corporations and large investors. However, security fraud can affect anybody. The most common types of securities fraud fall all into three categories: misrepresentation, insider trading, and stock options fraud.
Members of the general public are most susceptible to violations involving misrepresentation. Misrepresentation falls under Section 10b and Rule 10b-5 of the 1934 Securities Exchange Act. These provisions clearly prohibit stock brokers, financial advisors and others from making false statements or omitting important information in connection with the sale or purchase of securities. For example, a wave of scandals took place in the United States in 2002, when leading public accounting firms, including Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers—admitted that they had failed to prevent the publication of some corporate financial reports that had the effect of misleading private investors.
According to the 1934 Securities Act, a "false statement" is any statement that misleads or creates a false impression. However, to be considered a crime, the false statement or omission must be sufficiently important to sway the decisions of a reasonable investor. In addition, the statement or omission must have been made with the willful intent to deceive, manipulate or defraud. Thus, reasonable mistakes not intended to mislead or defraud are not considered actionable.
SOX ActMisrepresentation can also occur when a company's executives or accountants illegally conceal or falsify records concerning the debts, earnings, acquisitions, mergers, or other financially relevant transactions. Shareholders buy stock in companies on the belief that the companies are going to make profits, from which they will benefit. Therefore, misrepresentation, or accounting fraud, occurs when corporations purposely mislead investors into thinking that they are more financially sound than is truly the case. For example, during the Enron scandal of 2001, several of its top executives were accused of manipulating financial reports. As a result of this and other accounting scandals, the U.S. government introduced the Sarbanes-Oxley Act of 2002 to tighten controls concerning financial disclosures and to further discourage corporate fraud.
Insider TradingInsider trading occurs when a person, such as a corporate officer or major shareholder, with “inside knowledge”, or information not generally available to the public, about a company uses that information to trade stocks in a way that generates an unfair advantage. Corporate “insiders,” such as offers and members of the board, have a fiduciary responsibility to shareholders. They violate that trust if they share “insider” knowledge with others. For example, if an employee of a company shared confidential information about its profits or losses with a friend, and the friend bought or sold stocks in a way that gained unfair profits based on this information, both the employee and the friend would be guilty of insider trading. People who might have access to such insider information include stock brokers, financial analysts, investment bankers, and company employees. It is illegal for anyone with inside information to buy or sell stocks based on their unique perspective or special knowledge. Another kind of insider trading, called misappropriation, can occur when the “insider” knowledge concerned involves the abuse of confidential information. For example, a lawyer working for a corporation may help structure deals with other corporations. If the layer uses privileged information related to the companies’ transactions as a basis for buying or selling securities, or shares his knowledge with others for the same purpose, he or she would be guilty of “insider trading.”
Insider TradingInsider trading occurs when a person, such as a corporate officer or major shareholder, with “inside knowledge”, or information not generally available to the public, about a company uses that information to trade stocks in a way that generates an unfair advantage. Corporate “insiders,” such as offers and members of the board, have a fiduciary responsibility to shareholders. They violate that trust if they share “insider” knowledge with others. For example, if an employee of a company shared confidential information about its profits or losses with a friend, and the friend bought or sold stocks in a way that gained unfair profits based on this information, both the employee and the friend would be guilty of insider trading. People who might have access to such insider information include stock brokers, financial analysts, investment bankers, and company employees. It is illegal for anyone with inside information to buy or sell stocks based on their unique perspective or special knowledge. Another kind of insider trading, called misappropriation, can occur when the “insider” knowledge concerned involves the abuse of confidential information. For example, a lawyer working for a corporation may help structure deals with other corporations. If the layer uses privileged information related to the companies’ transactions as a basis for buying or selling securities, or shares his knowledge with others for the same purpose, he or she would be guilty of “insider trading.”
Options FraudStock options fraud entails backdating the stock options given to corporate executives and employees in a way that guarantees profits. Stock options are routinely offered to employees of publicly traded companies as an incentive for them to make their careers with the company and to gain their loyalty. Allowing employees within companies to buy stock options also helps to align their personal interest with that of the companies’ shareholders. Under these programs employees are given options to buy stocks in the company at a certain date in the future. However, the price they will pay for the stock in the future is fixed based on the valuation of the stock on the date the stock option is granted. Thus, if the face value of the stock rises over time, the employee stands to make a significant profit. Stock options fraud occurs when companies backdate the stock option grant to a time when the stock was trading at a lower price than it was when the granting actually occurred. This ensures that the stock option was already profitable at the time it was granted. In June 2006, an internal investigation at Apple revealed irregularities related to the backdating of stock option grants between 1997 and 2001. There has been an increase in the number of cases involving stock options fraud in recent years.
Sources: FindLaw.com and Lawfirms.com
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