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Securities Fraud Glossary


401(k) plan - A retirement plan that allows an employee to set aside part of his or her income (tax-deferred) in an investment account. The employee must keep the money in the account for a specified amount of time to avoid tax penalties.

ADTV - Average Daily Trading Value

Assets - The tangible and intangible 'possessions' of a company that have a price value. Tangible assets, which can normally produce cash quickly, include securities, accounts receivable, cash, inventory, office equipment and real estate property. Intangible assets include goodwill, brand, trademark, franchise and intellectual property rights.

Audit - During an audit a company or individual's financial/accounting or tax records are evaluated for accuracy.

Bear market - A period of time in which investment prices are in decline, usually in a couple industries, by fifteen to twenty percent. A bear market most commonly occurs during a recession, a time when unemployment is high, or during a time of quickly rising inflation.

Brokerage fraud - This form of fraud occurs when an advisor, stockbroker, or brokerage firm offers investors biased, unfounded, or contradictory investment advice out of a conflict of interest. Conflict of interest frequently occurs when an analyst or stock researcher is influenced by the investment banking activities of his or her firm. It is the analyst/broker's responsibility to disclose any conflict of interest to his or her investors prior to giving advice. Brokerage fraud is also known as investment fraud.

Bull market - An period of time in which investment prices are rising or expected to rise. Bull markets most often occur when the market is recovering from a recession or experiencing a boom. Investor optimism can also create a bull market.

CEO - Chief Executive Officer

CFO - Chief Financial Officer

Chapter 7 bankruptcy - A Chapter 7 bankruptcy allows a company to liquidate its assets upon deciding that it is not capable of paying the debt it has accrued. Once the company's assets have been sold and the funds have been distributed to creditors, it is free from liability.

Chapter 11 bankruptcy - Under Chapter 11 bankruptcy a company is protected from creditors while it restructures its business, usually by downsizing and narrowing focus.

Common stock - These are shares in a corporation that entitle the holder to a certain amount of company ownership. Common stock shareholders have voting rights, and receive dividends as the company grows. If the corporation files for Chapter 7 bankruptcy, the common stock shareholder will receive money after bondholders, creditors and preferred stock shareholders.

Corporate fraud - This form of fraud occurs when a corporation deliberately skews or conceals information in order to appear successful. A corporation may commit fraud by manipulating accounting records, hiding debt, or failing to inform shareholders of loans and bonuses given to executives. Also known as shareholder fraud.

Corporation - A legal designation given to a company recognized as its own entity, independent of its directors and founders. Because everyone within a corporation is an employee, no single individual is liable for the company's debt of failure. Corporations issue stocks and bonds.

Creditor - A person, business, or firm to whom money is owed.

ECN - Electronic Communications Network

Equity - The portion of a corporation owned by a shareholder of common stock or preferred stock.

Favorable coverage - Reports and recommendations published in favor of a particular stock. Analysts cover specific companies, researching how successful they have been in the past, how they are presently functioning, and how they are expected to perform in the future. The stock of a company is rated on a five-point scale. An 'accumulate' or 'buy' rating would be considered favorable coverage.

Fraud - An act of misrepresentation in the intent to delude.

Investment banking - A form of banking done by investment banking firms for corporations, often in exchange for fees and commissions. The bank performs public offerings, acts as a broker, and carries through mergers and acquisitions.

Investment fraud - The SEC's guidelines for stockbrokers and advisors were designed to ensure that investment advice would be given fairly and consistently to investors. Investment fraud occurs when an advisor, brokerage firm, or stockbroker advises against the SEC's guidelines. Investment fraud is also called brokerage fraud.

IPO - Initial Public Offering

Laddering - This practice artificially inflates the value of stocks. Laddering occurs when underwriters of IPOs obtain commitments from investors to purchase shares again (after they have begun trading publicly) at a specified, higher price.

Liquidation - The selling of all assets, tangible and intangible, normally in order to pay creditors and resolve debt.

MSRB - Municipal Securities Rulemaking Board

NASD - National Association of Securities Dealers

Nasdaq - National Association of Securities Dealers Automated Quotation

Preferred stock - A preferred stock shareholder forfeits his voting rights, but receives dividends (which are set at a specified rate) before the common stock shareholder. In the event of a liquidation, bankruptcy preferred stock shareholders are paid before common stock shareholders.

Public offering - During a public offering new shares are made available. One or more investment banking firms will underwrite a public offering, committing to the issuer that a set number of shares will be sold at a set price.

SEC - Securities and Exchange Commission

Securities - Stocks and bonds that investors may purchase. Stocks pay the investor dividends (or cost him losses) and give him partial ownership in a corporation. Bonds pay the investor a set amount of interest over a certain amount of time. Bonds do not entitle the investor to any ownership, though they do require repayment upon company liquidation.

Securities Exchange Act of 1934 10(b) - It is unlawful to use a "manipulative or deceptive device" or scheme against the rules and regulations of the commission in connection with the purchase or sale of a security.

Securities Exchange Act of 1934 20(a) - A person who controls another person (who is liable to the provisions of the Securities Exchange Act) will be responsible, to an extent, for the effect of the controlled person's actions on any person toward whom he or she had a responsibility.

Securities fraud - When an entity or individual intentionally distorts information available to investors in an effort to control or manipulate the market.

Shareholder fraud - When a corporation misinforms its shareholders. Also known as corporate fraud.

SIPC - Securities Investor Protection Corporation

Spinning - When a brokerage firm is interested in obtaining business from a particular company, it may offer that company's executives IPO shares under the understanding that they will direct their company's investment banking business toward the firm.

SRO - Self-Regulatory Organization

Underwriting - One or more investment banking firms may underwrite public offerings. The underwriters have the responsibility of pricing new shares and selling them to investors in order to raise capital for the client company. The company pays the underwriters a fee (normally about six percent of the value of the offered shares).

Voting rights - Common stock shareholders may vote on corporate decisions in the companies they hold ownership in. These may include board member appointments, policy issues, stock splits, and other decisions.

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