The internet has made it easier than ever for individuals from all walks of life to invest successfully in securities and commodities. There are opportunities for investors looking for short-term gain, long-term growth and everything in between. However, where money goes, fraud is sure to follow.
The explosive growth of securities investment has led to a similar growth in securities fraud. Even the most sophisticated investor can be a victim of securities fraud. Understanding how securities fraud occurs is imperative for anyone interested in investing.
Corporate Securities Fraud
Securities fraud can happen at every level of an investment, from the company in which an investor has purchased stock to the firm that is holding an investor’s account to securities professionals to whom the investor has entrusted her account funds.
Corporate securities fraud is at the company level and includes such violations of securities laws as insider trading and accounting fraud. Insider trading is illegal because it has the potential to decimate the value of a company, leaving stockholders to bear the losses without an opportunity to trade the stock before its value decreases. Company insiders gain information by virtue of their position “inside” the company, information that is not known to the public, and use it to trade to their own advantage. This unfair advantage can affect the value of a company’s stock considerably, which in turn can have ruinous results for company stockholders. Corporate accounting fraud is equally detrimental to stockholders, because they are misled by the company’s inaccurate accounting reports which skews the perception of the company’s financial health. Both of these practices are not always easy to uncover before stockholders suffer substantial losses, but there are federal and state laws that are specific to corporate securities fraud that may help a stockholder recoup losses. Whether investing directly or through a brokerage firm account, investors should do a deep dive into any company’s financial health and history before committing to purchase stock.
While corporate securities fraud can affect individual investors, they are not the most dangerous. Instead, there are several types of scams that target investors directly. Ponzi schemes, pyramid schemes, advance-fee schemes and bogus investment opportunities are all common threats investors face. These types of fraud rely upon convincing pitches by brokers and flashy marketing techniques that hide a lack of actual value for the investors.
How to Recognize Securities Fraud that Targets Investors Directly
Ponzi and pyramid schemes mask themselves as high-yield, low-risk investments. Modern versions of these age-old scams often come bundled with professional, polished-looking marketing materials. This obscures the fact that there is no real investment product involved in the process. Instead, the con artist running the scheme is paying off early investors with funds from new investors, while skimming their own take off the top.
Advance-fee schemes are typically the work of charismatic speakers. A supposed fund manager will request a fee to cover taxes before setting up an account for the investor. The fund they supposedly represented may even be real, but their connection to it is not. After the fee is sent, the fund manager will disappear, never to be heard from again.
There are important clues that an investor should be aware of that may be a sign that an investment is actually a fraud:
- The investment opportunity was unsolicited – the perpetrator reached out to you, instead of vice versa.
- The investment sounds “too good to be true,” offering quick, high yield returns with little to no risk.
- The perpetrator gives you no time to think or do your own research, claiming that the opportunity to invest is now or never.
- The investment’s website does not include much information about what is being invested in or where the money is actually coming from.
- The perpetrator has no experience or is not licensed as a financial industry professional.
Always do your research before investing. Securities fraud schemes rely upon investors being seduced by the glossy fast-paced pitch and not taking the time to do their own due diligence.
In addition to fraudulent schemes that take investors’ money and run, unscrupulous brokers and firms can also engage in securities fraud, even if the broker and/or firm are duly registered and licensed. Brokers who engage in “selling away” attempt to sell investments that are not offered by the firm they represent. Using their influence and an investor’s trust, a broker can also engage in “churning,” which produces excessive commissions by selling and buying in rapid succession, often without any regard for the best interests of the investor. Firms have been sued and fined for engaging in securities fraud schemes of their own, a prime example of which would be the millions of fake accounts opened by Wells Faro Advisor, LLC’s brokers throughout the United States.
How to Recover from Securities Fraud
If you have been a victim of investment fraud, contact a securities fraud specialist attorney immediately. In most cases, time is of the essence: the sooner fraud victims take action, the more likely it is that their funds can be recovered. Reach out to our experienced fraud attorneys in Girard Bengali today for a free consultation regarding your case.