The Cost of Securities Fraud

71 Pages Posted: 29 Feb 2012 Last revised: 26 May 2014

See all articles by Urska Velikonja

Urska Velikonja

Georgetown University Law Center

Date Written: November 6, 2012


Under the dominant account, fraudulent financial reporting by public firms harms the firms’ shareholders and, more generally, capital markets. This Article contends that the account is incomplete. In addition to undermining investor confidence, misreporting distorts economic decision-making by all firms, both those committing fraud and those not. False information impairs risk assessment by those who provide human or financial capital to fraudulent firms, the firms’ suppliers and customers, and misdirects capital and labor to subpar projects. Efforts to hide fraud and avoid detection further distort fraudulent firms’ business decisions, as well as decisions by their rivals, who mimic or respond to what appears to be a profitable business strategy.

If fraud is caught, managers externalize part of the cost of litigation and enforcement to employees, creditors, suppliers, and the government as the insurer of last resort. Mounting empirical evidence suggests that harm to non-shareholders dwarfs that suffered by defrauded shareholders. Moreover, unlike investors, who can limit their exposure to securities fraud by diversifying their holdings and demanding a fraud discount, other market participants cannot easily self-insure. The Article supplies both theoretical and empirical support for the assertion that defrauded investors are not the only victims of accounting fraud. In conclusion, the Article outlines and assesses some alternative fraud deterrence and compensation mechanisms.

Keywords: Securities Fraud, Financial Misrepresentation, WorldCom, Enron, Sarbanes-Oxley Act, JOBS Act

Suggested Citation

Velikonja, Urska, The Cost of Securities Fraud (November 6, 2012). William & Mary Law Review, Vol. 54, pp. 1887-1957 (2013), U of Maryland Legal Studies Research Paper No. 2012-9, Available at SSRN: or

Urska Velikonja (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics