What is Securities Fraud? Definition, Main Elements and Examples

By | December 17, 2022

What is securities fraud?

Securities fraud, also known as stock or investment fraud, is a type of white-collar  crime that  can be committed in a variety of ways, but mainly involves misrepresentation of information that investors use to make decisions.

Scammers can be individuals, such as stockbrokers. Alternatively, it could be an organization, such as a brokerage firm, a corporation, or an investment bank. Independent individuals can also commit this type of fraud through schemes such as insider trading.


  • Securities fraud is an illegal or unethical activity carried out in the securities or asset market to make a profit at the expense of others.
  • This type of fraud is a serious crime that usually involves the investment world.
  • Examples of securities scams include Ponzi schemes, pyramid schemes, and late trading.
  • Securities fraud can also include false information, pump-and-dump schemes, or insider trading.

Definition of Fraud Effect

The Federal Bureau of Investigation (FBI) describes securities fraud as criminal activity that can include high-yield investment fraud, Ponzi schemes, pyramid schemes, advanced fee schemes, foreign currency fraud, embezzlement, hedge fund-related fraud, and late trading. 1 In many cases, scammers seek to deceive investors through misrepresentation and manipulate the financial markets in some way.

These crimes include providing false information, withholding key information, offering bad advice, and offering or acting on inside information.

Types of securities fraud

Securities fraud takes many forms. In fact, there is no shortage of methods used to deceive investors with false information. High-yield investment scams, for example, can come with a guaranteed high rate of return, while claiming there is little or no risk. The investments themselves can be commodities, securities, real estate and other categories. Advanced schemes can follow a more subtle strategy, where scammers convince their targets to advance them the small amount of money they promise to generate higher returns.

Sometimes money is required to cover processing fees and taxes on funds that would otherwise be waiting to be disbursed. Ponzi schemes and pyramids generally rely on funds provided by new investors to pay promised returns to previous investors caught up in deals. Such schemes require fraudsters to constantly recruit more victims in order to defend the charade for as long as possible.

One of the newest types of securities scams is Internet fraud. This type of scheme is also known as a pump-and-dump scheme, where people use chat rooms and forums to spread false or fraudulent information about stocks. The goal is to force a price increase on those stocks, pumps, and then when the price reaches a certain level, they sell it, a landfill.

The FBI warns that security fraud is often seen by unsolicited offers and high-pressure sales tactics by scammers, along with demands for personal information such as credit card information and Social Security numbers. 1 The Securities and Exchange Commission (SEC), the FBI, and other federal and state agencies investigate suspected securities fraud. Such crimes may carry both criminal and civil penalties, resulting in imprisonment and fines.

Examples of securities fraud

Some common types of securities fraud include manipulating stock prices, lying on SEC filings, and committing accounting fraud. Some well-known examples of securities scams are the Enron,2 Tyco,3 Adelphia,4 and WorldCom scandals.   5

Here, bad actors try to manipulate stock prices for their own benefit by spreading false information, often through the internet or newsletters, and then exiting their positions after unsuspecting investors act on that false information. For example, during the summer months of the stock below, the pump-and-unload scheme begins by using the “wrong number” scam. A message was left on the victim’s answering machine that talked about a hot tip and was built to make the victim think the message was an accident.

Image by Sabrina Jiang © Investopedia 2020

As seen in the chart above, the price rose from around $0.30 to almost $1.00, an increase of more than 200% over a one-week period. This drastic increase is observed along with an equally large increase in volume. Stocks have seen an average daily trading volume  before the price increase of less than 250,000, but during the scam, stocks traded up to nearly 1 million shares over several trading days. Unsuspecting investors will buy stocks at around $1.00. As seen above, it dropped to about $0.20, an 80% drop in value for those unfortunate investors.

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