Also known as ‘stock fraud’ and ‘investment fraud’, securities fraud is a legal term given to a misleading practice in the stock/commodities markets that result in investors making purchase or sales decisions based on false information; these decisions would most often result in financial losses and the breaking of security laws. Securities fraud is a complex term as it also includes blatant theft from investors like that which take place by stockbrokers with embezzlement and stock manipulation, misrepresenting public financial data, and withholding the truth from corporate auditors. Incidents of insider trading, front running, and other illegal actions on the trading floor also qualify.
Failure to Disclose
The legal term ‘failure to disclose’ refers to the act of a company or individual that leaves out important information. A common example of a failure to disclose is when large-scale companies fail to disclose pertinent material facts about a product or service that they provide. The omitted information could have resulted in the consumer or individual making a different choice. A failure to disclose is an act of misrepresentation and fraud.
Misrepresentation and Fraud
In most cases of fraud, there is a misrepresentation of intent made by the company being charged. In other fraud cases, misrepresentation occurs by an omission of information like a product’s defect or a hidden fee. In these cases, the companies or an individual’s silence is also considered an act of fraud.
Those who manufacture and sell products or services are privy to more information than the consumer as the consumer only knows what they are allowed to know or are able to find out on their own. To counteract this unfair advantage, companies are legally bound to disclose material facts to potential consumers before they purchase the product, or afterwards in the event of product recalls.
When Silence and Misrepresentation Equals Securities Fraud
In the context of securities fraud, these fraudulent acts take place in the stocks and commodities markets when investors make decisions to buy or sell stocks based on information that was misleading, false, or deceitfully omitted. Situations where a stockbroker embezzles money, misrepresents the status of a stock, or gives inside tips to friends and family regarding when to buy and sell stocks constitute insider trading and securities fraud. All of these instances are examples that answer the question, “When is failure to disclose information considered securities fraud?” If the truth of financial assets and matters are withheld from corporate auditors, this is also considered securities fraud.
Failure to disclose information that falls under the umbrella of securities fraud does not just refer to information that has not been disclosed, but also information that was actively withheld or altered. Front running is also a fairly common act of securities fraud, and this takes place when an individual, usually a broker or brokerage firm, enters into a stock or trade based on non-public knowledge before it is released to the general public. Those kind of acts influence the price of said stock and represent the prohibited practice of front running or ‘tailgating’ as the front runner benefits from the use of information that will harm its own clients and the public market.
Rules, regulations, and laws are put into place to regulate stock and commodities markets in order to protect the integrity of the public marketplace. When information is not disclosed, is misrepresented, or is acted upon before the public has access to it, a securities fraud whistleblower lawyer should be enlisted to help maintain that order.