The definition of financial fraud is intentional deception for financial gain, such as with insider trading, embezzlement and Ponzi schemes. Residents of New York may want to learn about the types and signs of financial fraud.
Insider trading
Insider trading is a type of financial fraud that involves a person trading securities by using proprietary information. A person with non-publicly disclosed information about an entity or business can buy or sell securities such as stocks. An executive finding out about a sale early and selling stocks is illegal. Warning others to sell stocks before the sale is public is insider trading. Committing insider trading may artificially deflate or inflate stock prices.
Embezzlement
Embezzlement is a type of financial fraud that occurs when a person entrusted with funds misuses them for personal gain. A person needs to be in a position of trust and have control of the funds. For example, a trustee for a child could dip into trust funds for their expenses instead of for the child.
The banking industry is a frequent target of internal embezzlement. Many financial institutes have strict security programs so that no individuals have unrestricted access to funds.
Ponzi schemes
Ponzi schemes are a tricky type of financial fraud that is difficult to track. The schemer tells people about a business or project and gets people to invest. The person promises high profit from the investment, but investors receive money from new investors instead of real profit. This type of financial fraud needs re-investment by investors assuming that they’ll make more profit. The schemer replenishes the money pool with new investors instead of the falsified claims.
Many financial fraud schemes use the falsification of financial records. For instance, embezzlement schemes may hide the tracks of the embezzler. A manager could embezzle money with the records of a non-existent employee. Companies may commit financial fraud by making their profits seem lower than they are to avoid taxes. All of these offenses are against the law and could come with harsh penalties.