Securities fraud can also include outright theft from investors (embezzlement by stockbrokers), stock manipulation, misstatements on a public company's financial reports, and lying to corporate auditors.
[8] Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May 2008.
[9] FBI Director Robert Mueller predicted in April 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.
According to enforcement officials of the Securities and Exchange Commission, criminals engage in pump-and-dump schemes, in which false and/or fraudulent information is disseminated in chat rooms, forums, internet boards and via email (spamming), with the purpose of causing a dramatic price increase in thinly traded stocks or stocks of shell companies (the "pump").
In other instances, fraudsters disseminate materially false information about a company in hopes of urging investors to sell their shares so that the stock price plummets.
[18] In microcap fraud, stocks of small companies of under $250 million market capitalization are deceptively promoted, then sold to an unwary public.
[19] Microcap fraud includes pump and dump schemes involving boiler rooms and scams on the Internet.
[20] These manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements.
Very often, the perpetrator will claim to have "inside" information about impending news to persuade the unwitting investor to quickly buy the shares.
Though not a scam per se, one notable example is rapper 50 Cent's use of Twitter to cause the price of a penny stock (HNHI) to increase dramatically.
Described (but perhaps overstated) as "the biggest stock promotion of all time", Lithium Exploration Group's market capitalization soared to over $350 million, after an extensive direct mail campaign.
During 2006 and 2007, securities fraud class actions were driven by market wide events, such as the 2006 backdating scandal and the 2007 subprime crisis.
In addition, white collar criminals are expanding the scope of their fraud and are looking outside the United States for new markets, new investors, and banking secrecy havens to hide unjust enrichment.
For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
Potential perpetrators of securities fraud within a publicly traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to: Enron Corporation[28] exemplifies all five tendencies, and its failure demonstrates the extreme dangers of a culture of corruption within a publicly traded corporation.
[40] Even if the effect of securities fraud is not enough to cause bankruptcy, a lesser level can wipe out holders of common stock because of the leverage of value of shares upon the difference between assets and liabilities.
The regulation and prosecution of securities fraud violations is undertaken on a broad front, involving numerous government agencies and self-regulatory organizations.
One method of regulating and restricting a specific type of fraud perpetrated by pump and dump manipulators, is to target the category of stocks most often associated with this scheme.
These regulations proved effective in either closing or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector.
[46] However, sanctions under these specific regulations lack an effective means to address pump and dump schemes perpetrated by unregistered groups and individuals.