Securities Fraud

History of Securities and Their Markets

The purpose of financial markets in general, and securities markets in particular, is to produce, manage, and structure capital formation. The basic elements of legally obtaining operating expenses are more than 200 years old. Governments and corporations sometimes borrow necessary operating capital by issuing bonds. Because there is no private sector income source that is comparable to taxation, private enterprises are also empowered to raise funds by selling partial corporate ownerships, called shares or stock. The success of financial markets lies in their ability to create new products, make existing products more efficient, and improve information management systems to increase the number of market transactions, while concomitantly enhancing the speed and transparency of market transactions.

The nature and continued existence of securities markets require both innovation and regulation, despite the frequent conflict between these two demands. The inherent incongruity of innovation and regulation is reflected in the nature and prevalence of illegal activities within these markets, namely, the multitude of types of transactions that are covered by the broad classification of securities fraud.

As markets strive for innovation, existing boundaries are challenged and new territories become available for capital exploitation. Regulators face two significant challenges. First, they must maintain absolutely current definitions of the boundaries of existing practices to ensure that innovations devised by attorneys and other securities experts do not violate the market's fundamental requirements of protecting customers and ensuring an even playing field. Second, regulators must protect the market from individuals and firms whose goal is to reap illegal profits through fraudulent activities made possible by the technologies, innovations, and targets that are part and parcel of the industry itself. In other words, regulators must protect against illegal activities of “fraudsters” who follow behind the legitimate money flow.

Activities that fall within the broad domain of securities markets are complex and constantly changing. Although most people think securities consist of common stock, bonds, and options, the term actually includes a vast array of financial and investment devices. The 1933 Securities Exchange Act defines a security as

The growth and development of new investment devices—from the mutual funds that gained popularity in the 1980s, to the current, collateralized mortgage obligations—have blurred the already hazy notion of securities even further. Typically, new or unusual devices fall within the Security and Exchange Law's sweeping category of investment contracts. However, the meaning of investment contract is not defined in the statute, and has not been conclusively decided in court.

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