What Kinds of Securities Fraud Does the SEC Investigate?

The securities and exchange commission (SEC) is a government agency designed to protect average investors from fraud in the financial markets. In the huge pool of companies and individual investors, there are big fish who are able to weather storms and influence the markets.

For the small guys, a couple of bad actors can ruin them financially. The SEC investigates these bad actors and tries to restore what vulnerable investors have lost. A securities fraud whistleblower attorney can help to expose these bad actors.

What Is an SEC Investigation?

The enforcement division of the SEC is the entity that investigates potential fraud in the financial markets. These are typically civil actions brought against individuals and/or corporations for violations of securities laws.  

The division first obtains information on potential violations in the beginning of its investigation.  Much of the time, this evidence comes from so-called whistleblowers who are members of an organization being investigated. These are people with direct knowledge of violations and who are instrumental in the uncovering of wrongdoing.  

What Types of Securities Fraud Does the SEC Investigate?

Securities fraud can take many forms but the two most basic are attempts to defraud unsophisticated investors and insider trading.  

Defrauding Unsophisticated Investors: In these scenarios, brokers or others who deal in securities may deceive or mislead investors who are not well-versed in the stock or securities markets. They may promise large returns, fast returns, or otherwise entice unwitting participants to give their money over to investments that are doomed to fail.  

These are often called Ponzi schemes or pyramid schemes and are easier to detect without inside actors blowing the whistle on activities. Often fraud is not uncovered until it is too late and those people who were swindled often cannot recover their money.

Insider Trading: This type of securities fraud is notoriously difficult to detect because it is perpetrated by sophisticated actors in the financial industry. Often it can be undetectable by even those who see it because it requires a deep understanding of how securities markets work.

Insider trading is basically trading stocks or other securities when you have knowledge that the general public does not have access to. This creates an unfair advantage for some investors and can create anomalies in securities markets that negatively influence opportunities for all investors.

The SEC investigates both types of fraud (and many others).

Other common violations of securities laws include the following:

  • Omission or misrepresentation of crucial information related to securities
  • Influencing the market pricing of securities
  • Violations of broker responsibilities to treat clients fairly
  • The sale of unregistered securities
  • Stealing client money or securities

Types of Proceedings

The SEC’s enforcement division can either bring about a civil action or an administrative action. In a civil action, the Commission files a court order (usually called an injunction) that stops an entity from performing any other action that would break the law. The matter is then handled in a civil court with a variety of potential outcomes.

In an administrative action, proceedings are heard by an administrative law judge and the decision is made by that individual.  

Are Whistleblowers Rewarded for Talking?

Yes, and as a matter of fact, many whistleblowers have been handsomely rewarded by the SEC for providing information that assisted in exposing and prosecuting securities fraud. While there are many levels of rewards, some of the highest ones ran into the millions of dollars for exposing fraud in companies.  

People who speak up are kept anonymous by the SEC as long as they assist in finding information that the SEC would not have otherwise had.  

Further Reading