Securities, Tax, and Bankruptcy Fraud

Three more areas the Law section tests, each with its own statutory home. Securities fraud protects investors and the integrity of capital markets. Tax fraud protects the public revenue.

And bankruptcy fraud protects a court process meant to give honest debtors a fresh start from people who abuse it. You don't need deep expertise in any of them, but you do need to recognize the conduct, name the governing law at a high level, and know the tells. Let's take them in turn.

Securities regulation rests on two foundational statutes, and the exam wants you to keep their roles straight by the year. The Securities Act of nineteen thirty-three governs the initial issuance of securities — think of it as the 'going public' law. It's about full and truthful disclosure when a company first sells stock to the public, and it requires registration of the offering.

A simple memory hook: thirty-three is the primary market, the first sale. The Securities Exchange Act of nineteen thirty-four governs ongoing trading in the secondary market, where investors trade among themselves, and it created the Securities and Exchange Commission, the S-E-C, as the enforcer. So thirty-three is issuance, thirty-four is trading and the regulator.

The single most important anti-fraud provision flows from the thirty-four Act: Rule ten-b dash five, which broadly prohibits any device, scheme, or artifice to defraud, and any material misstatement or omission, in connection with the purchase or sale of a security. It's the catch-all workhorse behind most securities-fraud cases, including insider trading, so expect to see it cited often.

Two securities frauds the exam loves. Insider trading is buying or selling securities on the basis of material, non-public information in breach of a duty. That breach-of-duty piece is the whole exam point, so don't skip it: under the classical theory, a corporate insider — an officer, director, or employee — breaches a duty owed to the company's shareholders by trading on what they learned.

Under the misappropriation theory, an outsider — say a lawyer or printer who learns of a pending deal — breaches a duty to the source of the information by trading on it, even though they owe nothing to the shareholders. Tippers and tippees can be liable too when the tip breaches a duty for personal benefit. The trap to remember: mere possession of confidential information isn't automatically illegal — the breach of duty is what makes the trade unlawful.

Market manipulation is the other family: pump-and-dump schemes that inflate a thinly traded stock with false hype and then dump it on the suckers, churning by a broker who trades excessively just to generate commissions, and spreading false rumors to move a price. Both families distort the honest, information-driven pricing that markets depend on.

Tax fraud, principally tax evasion under twenty-six U-S-C section seventy-two-oh-one, requires willfulness — an intentional, voluntary violation of a known legal duty. That willfulness is the bright line the exam tests between criminal tax evasion and lawful tax avoidance. Arranging your affairs to minimize tax using legitimate means is avoidance, and it's perfectly legal.

Hiding income, claiming fabricated deductions, or keeping a second set of books to deceive the taxing authority is evasion, and it's a crime. Think of it this way: avoidance uses the tax code, evasion hides from it. The exam will give you a taxpayer doing something clever and ask whether it's a crime — and the answer turns entirely on whether they used legitimate means or deceived the government.

Common tells for an examiner: unreported cash income, personal expenses run through a business as if they were deductible, overstated or fabricated deductions, structuring to look poorer than you are, and the classic two-sets-of-books arrangement where the real numbers and the reported numbers diverge. That double set of books is almost a signature of intent, because there's no innocent reason to keep two.

Bankruptcy fraud, eighteen U-S-C section one fifty-two, punishes abuse of the bankruptcy process — most commonly concealment of assets the debtor should have disclosed, false oaths and statements in the filings, and fraudulent transfers made to put property beyond creditors' reach before filing. A planned, premeditated version is the bust-out, where a business builds up credit, buys a flood of goods on that credit with no intention to pay, quietly sells them off for cash, and then files for bankruptcy leaving suppliers unpaid. The hidden-asset pattern is the one to recognize fastest: a debtor who suddenly transfers property to a relative right before filing is waving a red flag.

For the exam, your task across all three arenas is the same matching move you've practiced: deceiving investors about a security points to Rule ten-b dash five; willfully defeating a tax due points to evasion under section seventy-two-oh-one; hiding assets from the bankruptcy court points to section one fifty-two. Next, we cover individual rights and the constitutional limits on examinations.