Role Of SEC In Relation To Financial Fraud Essay Samples

Type of paper: Essay

Topic: Investment, Stock Market, White Collar Crime, Finance, Fraud, Bad Faith, Commission, Information

Pages: 3

Words: 825

Published: 2021/02/13

Investment Fraud

Investment Fraud
Persons investing in securities need protection against fraud. The United States Securities and Exchange Commission securities act of 1933 outlines two basic principles. First investors ought to receive financial and any other relevant information on securities on offer for public sale and secondly the law prohibits any kind of deceit, misinterpretations and any other fraud during the process of acquiring securities. But this is not to brush aside the fact that fraud occurs in sale of securities to investors.
Through registration of securities, investors get access to important financial information about securities. This plays a big role in shielding them from fraud by making solid decisions based on their assessment of the securities. However, while SEC mandates sellers to provide accurate information, it is not absolute. Investors are allowed recovery rights if they prove that the important information provided was inaccurate or incomplete.
Investment fraud consists various categories of illegal activities. Majorly, fraudsters directly or indirectly deceive the investors or may manipulate financial markets. These scammers almost always try to make their venture sound lucrative while withholding important information about risks. Affinity fraudsters for instance, will befriend investors according to their religion, community or ethnic alignment. They press the relationship until they convince their new found friends to invest in their schemes.
Over the recent past, fraudsters have picked up a new style of attacking their prey. They may pick up lowly traded stocks, which they mostly own, and hype them on social media and online chatrooms. They do this by claiming to have top secret inside information and inside information. Since investors crave money making ventures, they quickly fall for the trap and start buying the stock and the price shoots. The original owners then sell their stock at inflated prices and soon the price falls tremendously. The majority if the anonymous buyers are left holding plenty of stock worth lesser than they paid for.
The Bernie Madoff Ponzi scheme is a clear example of how fraudsters can lure investors. In this scheme, Madoff took huge chunks of money from investors promising over 50% returns in 90 days. He then used subsequent remittances from new clients to pay off older clients’ profits to make the investment appear legitimate. Unfortunately after various reports to the SEC, clients requested their money from the scheme amounting to about $7billion. Madoff had a little over $200 million left to give. Thus the scheme could not hold water any more. He managed to cheat clients over $65 billion.
Madoff was a well-known and active figure of the financial industry. This gave him an upper hand and the trust he needed to run such a scam. It was very easy to believe that the 70-year old veteran understood the way around the financial market. He had helped set up Nasdaq and sat on the National Association of Security Dealers. He also advised SEC on trading issues and that might be the reason it took so long to pin him down.

Generally, all securities sold in the US must be registered. This provides a basis for investors to analyze the important information provided during registration and make sound judgement. SEC ensures that the company provides a description of their property; a clear description of the security offered on sale, information about the company’s management and independently audited financial statements. The registrations statements are then made public and can be examined by prospective investors.
SEC provides exemptions for registration for private offerings to a small or limited group of persons, offering that have a limit in size or intrastate offerings. Further securities of municipal state and federal governments are exempted from registration. This exemption aims at helping in capital formulation by reducing costs. Significantly, registration statements are examined to meet disclosure requirements by the commission.
According to the securities act of 1933, the Madoff’s Ponzi scheme should have been registered and all the important information provided to clients. This would have made it easier for clients to evaluate the money making procedure and make informed decisions.
Act 1934 mandates SEC to oversee all aspects of the securities industry. The commission is empowered to register, regulate and oversee brokerage firms, transfer and clearing agents. The commission also has authority over self-regulatory organizations NYSE, American Stock Exchange and the Financial Industry Regulatory Authority. This act prohibits deceitful conduct on the markets while providing the commission with disciplinary powers. Companies are required to provide periodic reports about public traded securities.
SEC may decide to forward a case to federal court or deal with it within the administration depending with the type of relief being sought. In a federal court, the commission usually asks for an injunction to prohibit any further acts that violate the Law or commissions regulations. The commission may also seek monetary penalties and return of illegal profits to victims. For instance, in Madoff’s case, the defendant was found guilty and imprisoned.
In an administrative case, where SEC seeks internal sanctions, an administrative law judge hears the case. The judge is usually independent of the commission and issues a conclusion based on evidence from division staff as well as the subject of the proceeding. Such sanctions provide both the commission and the subject with an appeal option.

Identifying, reporting, and preventing fraudulent behavior

It may not be easy to know which security will lead investors to the drain. However, investments that have super- normal profits over a short period of time should raise eye brows. Investors ought to ask questions, check backgrounds of financial advisers and avoid Ponzi schemes. This helps investors to always be in the know about any chances of victimization and fraud.
The best way to report fraud is writing to the SEC or peruse through the government website for options on reporting. Similarly, investors can report to local law enforcement agencies for follow up. Cases of suspected fraud should be submitted to federal agencies for investigation. Investors may also email or call the authorities with the contacts provided on the site.


Barnard, J. W. (2007). Creative Sanctions for Online Investment Fraud.
How Bernie Madoff's Ponzi Scheme Worked - Business Insider. (n.d.). Retrieved from | Investment Advisers: What You Need to Know Before Choosing One. (n.d.). Retrieved from - Protect Yourself. (n.d.). Retrieved from
United States. (2007). A guide for seniors: Protect yourself against investment fraud. Washington, D.C.: U.S. Securities and Exchange Commission, Office of Investor Education and Assistance.

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Role Of SEC In Relation To Financial Fraud Essay Samples. Free Essay Examples - Published Feb 13, 2021. Accessed November 28, 2023.

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