What Is Stock Fraud?

A stock is basically a piece of ownership of a company. Stocks are publicly traded on the stock market and are often sold by stockbrokers. Securities fraud, often called stock fraud, happens when a stockbroker, or other person involving in the sale of stocks, convinces an investor to purchase stocks on the basis of deceptive information or acts.

There are numerous ways in which stock fraud may be committed. One common scenario where stock fraud is found is when a company includes false information on the financial statement it is required to submit to the Securities and Exchange Commission (SEC). Each company that trades on the New York Stock Exchange is required to file a number of documents with the SEC, which are intended to give investors the necessary information on which to base an investment decision. If a company falsifies any of the information on the required filings, then it is committing stock fraud.

Another big area of stock fraud involves insider trading. The SEC has very strict rules against people with access to non-public information trading stock. Unfortunately, not all traders abide by those rules. When a person takes advantage of private or privileged information to buy or sell the company's stock, he or she is committing stock fraud. Capitalizing on insider information can devalue stock held by others or prevent others from benefiting from the information when it goes public.

Company officials may also be guilty of stock fraud for making false statements on documents other than those submitted to the SEC, such as an a corporate tax return. Omitting information, or exaggerating information, on advertising materials may also lead to stock fraud charges. Embezzlement by the officers of the company can be considered an act of fraud as well.

Fraud may be considered the basis for a civil lawsuit or may be filed as a criminal charge. If stock fraud is pursued through a civil lawsuit, the plaintiff who files the lawsuit will be awarded a monetary judgment at the end of the case if he or she prevails. If criminal charges are filed, the offender may face incarceration or probation if convicted. A stockbroker who has been convicted of fraud will also lose his or her license to trade securities as a rule, and may still have to repay any monetary damages the state can prove resulted from the fraudulent acts.