People toss around the term “fraud” all the time, often it to describe something fake or insincere. But when it comes to the legal understanding of the term in context of the securities laws, fraud means more than something fake. Understanding what fraud means is important for those who work in the financial sphere—especially if you’re working with clients who aren’t sophisticated investors. Where the line is between aggressive sales, marketing and investing, and actual fraud is sometimes hard to determine.
It can be helpful to go back to the basics of what fraud entails.
Securities Fraud, Defined
Generally speaking, the legal definition of fraud is:
- a materially false statement that is
- made with an intent to deceive
- a victim who relies on the statement, and
- the victim has suffered damages because of their reliance
Each prong of this definition is important. As an example, suppose a firm promises every client that a live human answers every call on the first ring. But sometimes, the receptionist is on another line, and it takes more than one ring to answer. Also, the firm uses voicemail after hours.
Even so, it’s hard to see the firm had real intent to mislead. At best, it was “puffery” (exaggeration). And it’s hard to see how the client was damaged. Therefore, this probably isn’t the beginning of a fraud claim.
On the other hand, if the firm never answered the phone specifically so clients could sell a house stock pushed by the brokerage firm, that’s more of a concern. Now, you have some intent and potential damages. This bizarre scenario played out at several boiler rooms during the 1990s.
A more classic example of securities fraud is a pump-and-dump. In a pump-and-dump, someone will try to temporarily boost sales enough to increase the value of a stock by making exaggerated or misleading representations, so they can quickly sell their existing holdings at a high profit.
But there’s an important distinction when it comes to securities fraud.
The Securities and Exchange Commission (SEC) rules make it clear that, of course, a false statement does suffice, but the law does not require that someone affirmatively says a falsehood to commit securities fraud. Instead, all that is required is that they fail to disclose truthful information investors would want to know before they invest.
Fraud takes many shapes including Ponzi schemes, churning, and false accounting or securities filings. The SEC regulates all types of securities fraud and its mission is to be the investor advocate. Only with the assistance of the public is the SEC able to identify and prevent many ongoing frauds.
If you are concerned your company is defrauding clients, and you’ve been considering becoming a whistleblower, the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase are here to help. For a free, confidential consultation, email us or call us today at (800)975-4345.