Stock market fraudulent activities can cause serious problems to not only companies but to investors too. Fraud may cause financial losses, emotional distress, compromised identities, and more. Companies need to prevent these activities if they want to maintain their reputation and ensure integrity in the market. For instance, some activities such as insider trading can compromise a company’s reputation if not well controlled.
However, not all insider trading activities are illegal. Employees, management, and directors can buy and sell shares, provided they disclose their trading details to SEC (Securities and Exchange Commission). The SEC then reveals the trades to the public. Ideally, insider transactions are considered illegal when a company’s representatives or employees give out nonpublic information to friends, fund managers, or family.
That said, what smart ways can companies use to prevent insider trading and other fraudulent activities? Check out this guide for some helpful tips.
The first step to avoiding fraud in the stock market is for companies to establish education programs for their employees and representatives. These programs should focus on providing knowledge and educating employees on how to avoid common trading scams. They should be taught how to prevent sharing nonpublic material details. Also, the employees need to learn the difference between sharable company materials and nonpublic information.
Besides, employees should understand the risks of disclosing information/details related to security offerings, litigation to outsiders, takeovers, and earnings. Furthermore, companies should teach them how to use https://www.insidertrades.com to track the purchasing and selling of trades.
Stock market trading companies can also use blackout periods to prevent designated people from buying company securities. This measure is often done around earning period. In case of any internal issue, a company should prevent its directors, officers, and other representatives from insider trading within their securities.
Monitoring Trading Activities
Another excellent way for companies to prevent fraudulent activities is to monitor trading activities in the market. For instance, they can do this through the Securities and Exchange Commission. The SEC often tracks the trading activities, especially during acquisitions, earnings announcements, and other important events that impact a company’s value. Such surveillance can help companies discover suspicious and irregular trades within events. That could help them investigate if the transactions were legitimate or not.
Companies and regulators can also use whistleblowers to gain valuable insights regarding insider trading. Whistleblowers can be company employees or other parties who know that people are trading on material nonpublic details and are willing to disclose the information.
For example, a company’s clients, service firms, or suppliers can disclose such information to the Securities Exchange Commission, earning them some commission in return. Other self-regulatory or media bodies like the Financial Industry Regulatory Authority (FINRA) can also be great resources to the SEC during fraud investigations.
Request Clearance From Legal Officer
Another way to minimize fraud is for companies to ask directors, officers, and other representatives to clear their purchases with the Chief Legal Officer (CLO). The clearance of a company’s securities can help avoid violations or conflicts of interest with the securities policies.
Complaints From Traders
Pump-and-dump is one of the most common frauds in the financial market. In this case, fraudsters deliberately purchase company shares of a low-priced stock then spread misleading or false information to pump up the price. The fraudster dumps the shares fast forward, which causes the stock’s price to fall significantly, leaving traders with nearly worthless stock. Fraudsters often use shell companies that are dormant and may be on the brink of bankruptcy.
Shell companies seldom file reports with SEC that may expose their information and company status to the public. The pump-and-dump scheme causes enormous losses, and this may increase trader complaints. Companies, in collaboration with regulators, can use these complaints to identify and prevent fraudulent activities. In many cases, insider traders leverage internal information to maximize their trading and sometimes exploit the options market to increase their returns.
For instance, if traders have any special knowledge about a company, they will take actions that favor them. If a trader knows that a company is being sold, they will acquire substantial call options before formal announcements are made. Such trades can serve as a red flag that someone is trading on nonpublic information. Investors and company owners should always be cautious about such signals.