Securities Fraud: What You Need To Know As an Investor
The number of people investing in securities and commodities, whether through retirement accounts, college savings plans, or some other investment vehicle, has increased by 600 percent since 1980. Unfortunately, this growth has led to a corresponding explosion of fraud in the financial markets.
Every year, losses associated with securities fraud are estimated to top $40 billion. These losses take the form of decreased business values, legal costs, and reduced or non-existent returns for swindled investors.
Almost anyone can be a victim of securities fraud. But, not everyone knows how to recognize or prevent it, and even the term itself can be a source of confusion: securities fraud encompasses a wide range of illegal activities. For anyone with a stake in the financial markets, a basic understanding of securities fraud can prove invaluable.
Types of Securities Fraud and Common Schemes
Securities fraud may be otherwise known as stock fraud or investment fraud. Securities fraud generally involves the deception of investors or the manipulation of financial markets. Three common forms of securities fraud are insider trading, accounting fraud, and misrepresentations.
Insider trading and accounting fraud generally take place in a corporate setting. Insider trading entails the illegal trading of securities by those who have learned valuable information not made available to the general public. Accounting fraud takes place when a company maintains inaccurate books or otherwise purposefully disseminates false information about the company’s financial status. Misrepresentations, on the other hand, consist of presenting misleading or untruthful information to an investor or to the public. While individuals within a company typically commit insider trading and accounting fraud, brokers, financial advisors and other types of money managers are common perpetrators of misrepresentations.
So what scams targeting investors are considered securities fraud? High-yield investment frauds are characterized by promises of high rates of return with little or no risk. Perhaps the most well-known are Ponzi schemes and pyramid schemes, in which cash collected from new victims is used to pay the high returns promised to earlier investors. While the payouts give the impression that a legitimate investment is driving the enterprise, in reality, defrauded investors are the only source of funding.
Advance-fee schemes are another type of securities fraud in which investors are asked to send fund managers relatively small amounts to cover purported taxes or processing fees in order to secure a lucrative investment opportunity. Of course, there is no underlying investment, and perpetrators quickly abscond with victims’ money.
Market manipulation or “pump and dump” schemes are yet another threat to investors. These frauds often occur with stocks that do not have a lot of trading volume. The aim of the fraudster is to artificially inflate or “pump up” the price of the stocks by aggressively recruiting investors using deceptive sales tactics or false information or rumors. Then, once share prices have reached a high enough level, the fraudsters sell (“dump”) their shares at a significant profit, to the detriment of hoodwinked investors. Not only are market manipulation schemes responsible for some $6 billion in losses annually, they also have the ability to shake investor confidence.
Some instances of securities fraud do not require a complex framework. Broker embezzlement involves the direct theft of client funds. Investors entrust private financial information to their brokers. This presents unscrupulous brokers with a tempting opportunity. Broker embezzlement may take the form of the forgery of investor checks, the unauthorized transfer of funds or securities, the sale of securities that do not exist or the acceptance of undisclosed kickbacks on the sale of investments.
Recognizing and Preventing Securities Fraud
In 2009, there were 1,510 pending securities and commodities fraud cases under investigation by the FBI. In total, there were 176 agents dedicated solely to combating securities and commodities fraud, up from 149 the year before. Still, even though significant law enforcement resources are committed to detecting fraud, investors are in a position to protect themselves and blow the whistle on fraudulent activities.
Researching investments thoroughly before committing funds is critical. While the law does not require it, investors would be wise to take the time to investigate both the investment and the seller through outside resources. This can be accomplished by researching the promoter’s company – calling the state where the company is incorporated to be sure it has a current annual report on file, contacting federal and state securities regulators to find out if there have been any complaints, researching the background of the sales agents, etc.
Investors also should request written copies of relevant financial documents (such as a prospectus, annual report or offering circular) and should determine whether the documents comport to the information provided orally by the promoter. Of course, even savvy investors can be taken advantage of, especially when a person in a position of trust is behind a securities fraud scheme.
Watch out for hallmarks of common schemes like high-pressure sales tactics, unsolicited investment offers, the seller’s request that you provide personal information over the phone or via the internet, promises of guaranteed returns and offers that generally sound too good to be true. Remember, scam artists can be quite skillful, and a well-honed sales pitch or a professional-looking website does not guarantee the legitimacy of an investment company.
If You Have Been a Victim Speak with an Attorney
Victims of securities fraud may initially feel embarrassed at allowing their money to fall into the wrong hands. But, being victimized should never be a source of embarrassment; some of the smartest investors on Wall Street have lost money to securities fraud.
If you suspect securities fraud, contact an attorney specializing in securities fraud and stockbroker misconduct. Your attorney can help you file an arbitration claim or a lawsuit in an effort to recover your investment losses. An attorney also can assist you in reporting the incident to the Securities and Exchange Commission, state securities regulators or law enforcement authorities to ensure that you do not say anything that could undermine your ability to recover your losses through an arbitration claim or lawsuit.
Victims have a better chance of getting their money back the sooner they take action. If you believe you may have been a victim of securities fraud, contact a lawyer today.
Speak with an Experienced Securities Fraud Attorney
If you are looking for a securities fraud attorney to review your rights and options, contact DKRPA today to arrange a FREE consultation with one of our experienced securities fraud attorneys. Our team of AV-rated* lawyers are recognized authorities on a variety of fraud topics and may be able to help you recover your investment losses.