Fraud, Market Manipulation, and Insider Trading

The whole unit on one sheet: the universal antifraud reach, the manipulation tactics, the information-advantage violations, and the agent-conduct rules the exam loves.

The Antifraud Foundation

• The antifraud provisions make it unlawful, in connection with the offer, sale, or purchase of any security, to employ a device or scheme to defraud, make an untrue statement of a material fact or a misleading omission, or engage in conduct that operates as a fraud or deceit.
• Broadest reach in the whole Act: applies to any person (registered or not, broker-dealer or issuer, individual or entity) and protects both buyers and sellers.
• Modeled on the federal antifraud rule under the Securities Exchange Act of 1934, with nearly identical language.
• Conduct that "operates" as fraud violates the rule even without proven intent to defraud.

Manipulative, Deceptive, and Fraudulent Devices

• Wash trade: buying and selling the same security through accounts you control, with no change in beneficial ownership, to fake trading activity.
• Matched orders: coordinating with another party to trade the same size, time, and price on opposite sides to fake active trading. A bona fide agency cross (real buyer matched to real seller) is permitted and is not a matched order.
• Painting the tape: a sustained series of transactions to create apparent activity or move the price and lure others in.

Information-Advantage Violations

• Front-running: trading for your own (or a favored) account ahead of a pending customer order likely to move the price. The pending order is itself material nonpublic information (MNPI). No profit is required; trading ahead is the violation.
• Spoofing: placing orders with intent to cancel before execution to fake supply or demand, then trading on the opposite side.
• Layering: a spoofing variant placing orders at multiple price levels; equally prohibited. A legitimate limit order later canceled due to changed conditions is not spoofing; intent to cancel is the test.
• Insider trading: trading while in possession of material nonpublic information (MNPI) in breach of a duty of trust or confidence. Insiders must disclose or abstain. Both the tipper and the tippee can be liable.

Agent-Conduct and Investor-Protection Rules

• Selling away: effecting transactions not recorded on the firm's books. Permitted only with written authorization from the broker-dealer before execution; verbal permission is not enough.
• Outside securities accounts: an agent opening an account at another firm must give prior written notice to the employing firm, which may then request duplicate confirmations and statements. Properly disclosed, this is not selling away.
• Exploitation of vulnerable adults (NASAA Model Act): reporting suspected exploitation of an eligible adult to Adult Protective Services and the Administrator is mandatory; delaying a disbursement and notifying a designated third party are permissive. A third party suspected of the exploitation must not be notified.
• Other prohibited activities: misrepresentations and half-truths, fictitious accounts, forgery, embezzlement, publishing non-bona-fide transactions or quotes, and guaranteeing a customer against loss (never allowed).

The One-Liners That Win Points

• The antifraud provisions have no exemptions; an exemption from registration is not an exemption from fraud liability.
• A half-truth is still a misrepresentation: selective true facts that mislead violate the rule.
• Possessing MNPI without trading is not insider trading; the violation needs an executed trade.
• Disclose or abstain is the insider's only choice; trading while keeping the secret breaches the duty.

Numbers to Lock In

Top Gotchas

• The antifraud provisions cover exempt securities and exempt transactions; an agent selling an exempt government bond or completing a private placement is fully subject to them.
• The Administrator's antifraud authority reaches any offer made or accepted in the state, so an out-of-state actor can still be caught.
• Material nonpublic information (MNPI) drives insider trading and front-running; merely overhearing information creates no duty, but knowingly trading on a tip that came from a breach does.
• Verbal approval never authorizes selling away; only prior written authorization does.
• The disbursement-delay figures are business days, not calendar days, and the delay is permissive while reporting to the government is mandatory.

One-Breath Recap

Start from the antifraud provisions: they reach any person and every security, including exempt securities and exempt transactions, with no exemptions, and the Administrator's authority follows any offer made or accepted in the state. On that foundation sit the specific bans: manipulative devices (wash trades, matched orders, painting the tape), front-running and the spoofing-and-layering fake-order games, and insider trading on material nonpublic information in breach of a duty, where both tipper and tippee can be liable. Round it out with the agent-conduct rules (selling away needs prior written approval, outside accounts need prior written notice), the vulnerable-adult protections (mandatory government reporting, permissive delays and third-party notice), and the flat ban on guaranteeing against loss, and this unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Fraud, Market Manipulation, and Insider Trading unit for the complete lesson.