Securities fraud is not only illegal but also unethical. It is the act of manipulating the information provided to investors to influence their decision-making. Securities fraud is committed for the personal interests of the individual or an organisation. Similarly to other scams, investment opportunities are portrayed in a way that is “too good to be true” which encourages individuals to want to invest. Realistically, the investment does not benefit them. 

Andrew Left is being accused of securities fraud

Recently, Andrew Left, founder of Citron Research and prominent short seller, is being charged with 17 counts of securities fraud as well as one count of engaging in a securities fraud scheme. Andrew was allegedly giving people misleading recommendations, providing false market assessments and misrepresenting his company’s position when it came to stocks. The short seller would allegedly claim that Citron’s trading position matched his recommendations, but that was not always the case. 

As a result of his actions, he allegedly made a lot of quick money as people believed there was no conflict of interest. Over the duration of the long-running scheme, it is claimed that Andrew made at least $16 million in profits. Legal experts are claiming that it can be hard to prove these allegations. However, the fact that the short seller is even facing them can have a long-term impact on his career and the success of his company.

Andrew Left is in a very difficult position that companies should seek to avoid: If he is proven innocent, then he is still suffering from the negative publicity the securities fraud allegations have caused. If he is guilty, then he might be imprisoned for his actions. There is no scenario where he will not be harmed in some way, which is why organisations need to detect securities fraud fast and respond appropriately. 

Different types of securities fraud

Andrew’s alleged scheme is an example of market manipulation, a type of securities fraud where individuals or companies try to inflate or deflate stock prices by interfering. People who commit this type of fraud usually present the company they are targeting in a very positive or negative light by falsifying financial statements, exaggerating or understating projected income and spreading false rumours about future partnerships and acquisitions. 

An individual who engages in market manipulation could have a lot of control over a share they are looking to buy by sharing a lot of negative opinions about it. Once the share price falls, they can then buy it and inflate the price. 

This is not the only example of securities fraud. There are more types that companies need to be on the lookout for:

  • Ponzi schemes
  • Insider trading
  • Pump-and-dump schemes
  • Accounting fraud
  • Microcap fraud

Ponzi schemes

A Ponzi scheme refers to the payment of early investors with money earned from later investors. This creates an illusion that encourages early investors to invest more, and it keeps going as more investors join. This type of securities fraud, which was named after Charles Ponzi, eventually ends when no more victims can be found. Individuals are usually unknowingly attracted to Ponzi schemes due to false promises of great profits. 

Insider trading

Insider trading occurs when employees within a company use non-public information to buy and sell stocks. The catch here is that the employee has a competitive advantage over other investors as they are not aware of potential changes that could happen in the company. Employees who use insider trading may share their data with close friends and families which can benefit them in the long run as they can sell before a big drop or buy before a huge increase. 

Please note that employees within a company can legally trade stocks, as long as they do not use private information to complete their trades. 

Pump-and-dump schemes

Pump-and-dump securities fraud scheme is the artificial inflation of a stock price once an individual or a company has bought it. The individual will try to manipulate publicly available information, try to influence others through social media or make exaggerated statements. Essentially, very similar to market manipulation and could be considered an example of securities fraud that Andrew Left allegedly committed. 

Pump-and-dump schemes can make an individual a lot of profit. If a large number of people fall for the scam, the stock price will increase, allowing the perpetrators to sell their stocks at a higher price. That way, they make a profit, while other buyers are more likely to make a loss. 

Accounting fraud

Accounting fraud looks to misrepresent a company’s financial health, usually with the goal of attracting more investors or new partners. Executives and accountants might work together to hide debts, overstate assets, lower expenses and inflate revenues to make the business appear more profitable than it is. This is illegal and extremely unethical as it can paint the company as a successful entity and trick the public into investing money and potentially seeking employment opportunities as well. In reality, the business may not be financially stable and resorted to accounting fraud to get quick cash. 

Microcap fraud

Microcrap fraud targets small companies with very low share prices, hence the word micro. Low stock prices are way easier to manipulate than higher ones. People are more likely to buy cheaper stocks as they can afford them and it takes less consideration to make the purchase. That is why scammers might focus on these stocks, as slightly positive publicity can lead to a great increase in stock value. 

Microcap fraud may also be tied to shell companies, as the company behind the stock may not even exist. Individuals will need to be wary if they see a lot of promotions about a penny stock when they have not even heard about the company selling it. 

securities fraud

The impact securities fraud can have on businesses

There are, of course, other types of fraud but those are the most common ones that companies or employees within a company may engage in. While securities fraud might seem as an easy way to make some quick money, in the long term, it can carry many consequences, including but not limited to:

  • Damaged reputation 
  • Stalled growth
  • Low employee motivation
  • Negative impact on the industry
  • Rise of misconduct

Damaged reputation

Securities fraud can have a detrimental impact on the reputation of an organisation, even if a sole individual was the one driving the crime. Stakeholders do not care about the individual as much as the fact that the business ‘allowed’ it to happen. Customers will be less likely to trust the business and look elsewhere for their purchases. Potential partnerships may also be impacted as smart businesses only want to deal with legal and ethical entities. 

Stalled growth

As a result of the damaged reputation, a company is likely to see stalled growth. They will probably suffer a lot of costs associated with high expenses but lower revenues due to negative publicity, legal fees and a decreasing customer base. In the worst-case scenario, a business may be pushed out of the market, depending on how big the case of securities fraud was. The more people it affects, and the more money involved, the bigger the impact will be on the future of the company. 

Low employee motivation

Just like with every other type of fraud, securities fraud can influence the employees’ perception of the company. The impact can be greater if the employees originally thought very highly of the organisation they worked for. The disappointment and negative feelings are likely to cause a drop in productivity as well as encourage staff to look elsewhere for employment. No one likes to say that they work for an unethical company. 

Negative impact on the industry

Securities fraud can cause issues for other companies as their own finances have been suffering due to market manipulation. This can lead to competitors exiting the market. While this may sound good in theory, sometimes competitors need to co-exist for supply chains to operate. As competitors exit a market, it may become more expensive for the organisation to operate. 

Rise of misconduct

If securities fraud occurs within a company, it is likely that there are also other types of misconduct that go unnoticed or are hidden from others. Securities fraud claims should raise a red flag that more serious crimes are yet to be uncovered, as one employee may be supporting another for their own benefit. 

How should you respond?

If you have received reports of securities fraud happening within your business, your best course of action would be to investigate immediately. Try to get as much information from the source and then look for an investigation team to handle the case effectively. 

At Polonious, we understand how harmful securities fraud claims can be for any organisation. That is why we have developed a system that aims to support investigators and companies at every step of the process. We enable investigators to create workflows that work for them and allow them to complete the investigation with complete confidentiality. No leaks, no false rumours, no negative publicity. 

We are here to provide investigators with a secure space to store all their data while the investigation is underway. To increase efficiency, Polonious can be integrated with various software and everything can be controlled from one place, no matter where you are. If you are looking to protect your business from fraud and manage your investigation’s workload, let us show you how we can help you speed things up. Book a demo today and we will support you along the way.