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Securities Fraud – How to Spot and Avoid It

Securities Fraud

Securities fraud covers a wide range of criminal activities involving financial markets. It can include high-yield investment fraud, Ponzi schemes, pyramid schemes, advance fee schemes, foreign currency fraud, and broker embezzlement.

It can also include “pump-and-dump” schemes where fraudsters spread false information about stocks to artificially drive their prices up (the pump) and then dump the shares for quick profits (the dump). The FBI warns that individuals involved in securities fraud may face civil and criminal liability.

Look for Signs of Fraud

So, what is securities fraud? Securities fraud is a serious white-collar crime that takes many forms. It can involve anyone in the financial business world, from a stockbroker or speculator to a company owner or even the head of a financial institution or investment bank. Typically, it involves misrepresenting information investors use to make decisions.

Every year, scam artists siphon billions of dollars from unsuspecting investors. This money can be stolen from pension funds, college savings accounts, or even personal investments made with hard-earned cash. In some cases, the investors never get their money back.

Investors can fall victim to various fraudulent schemes, including advance-fee fraud and promissory note fraud. In the former, the fraudsters ask victims to send them relatively small amounts of money — for example, for purported taxes or processing fees — to participate in a “too good to be true” investment opportunity. Then, they disappear with the funds.

Be suspicious of any investment offering that claims to offer above-market returns or guarantees – especially if you are being solicited by someone who isn’t a licensed broker. If you suspect something is wrong, insist on a written statement detailing all transactions in your account. You can also check the background of any person you are considering investing with by using CSA’s Disciplined Persons list.

Ask Questions

Scam artists rely on the fact that investors are not asking enough questions. Taking time to research the “mechanics” of an investment can help you spot fraud before it occurs. Don’t use unsolicited emails, message board postings, or company news releases as your only source of information. Legitimate investment professionals will respect your time and not pressure you to decide immediately. Beware of so-called affinity frauds, which target members of a particular social group, religious community, or ethnic background. They may tell you that everyone in your group is already invested, or they’ve victimized others in your same group.

Don’t Be Afraid to File a Complaint

Each year, fraudsters siphon billions from investors. If you are aware of securities fraud or suspect it, there are steps you can take to protect yourself. The SEC’s website provides tips, complaints, and referrals for concerns regarding investments or financial professionals and suspicions of Ponzi schemes, insider trading, and market manipulation. It also maintains policies and procedures in place to protect whistleblowers.

In addition to the SEC’s complaint system, there are independent agencies that will help you file a complaint against a broker or financial professional who you believe has committed misconduct. Before filing a complaint, gathering information, such as correspondence regarding the specifics of transactions, financial statements, and cancelled checks supporting your claims, is best.

If you file a complaint, it is best to retain a securities lawyer. A securities attorney can help you file your complaint and pursue other avenues of justice, such as arbitration before FINRA or JAMS or a lawsuit in federal court.

A successful SEC enforcement action can result in recovered funds being distributed to harmed investors. However, it is essential to remember that while these actions can help harmed investors recover some of their losses, a successful recovery will not compensate for all losses.

Keep Records

As an investor, you should always keep track of the cost basis of any securities you own. This helps you determine the amount of tax you owe when selling those securities. Fraudsters often sell these financial instruments for less than their actual value, and they use various methods to promote them. They may spread false information via news releases, Internet chat rooms, and forums to create a buying frenzy. After the stock price gains momentum, they dump the shares for profit. This type of fraud is known as a pump-and-dump scheme.

Other forms of securities fraud include:

  • High-yield investment fraud.
  • Ponzi schemes.
  • Pyramid schemes.
  • Advanced fee schemes.
  • Foreign currency fraud.
  • Broker embezzlement.
  • Hedge fund-related fraud.
  • Late-day trading.

Securities fraud is a white-collar crime that individuals, companies, and organizations can commit.

The number of securities scams is constantly growing. While a healthy dose of scepticism can help you spot red flags, many people fall victim to this fraud yearly. By committing to constant vigilance, you can protect yourself and your loved ones from falling prey to these fraudulent activities. This is especially important in an environment where investors are showered with offers of investment opportunities, often from unscrupulous individuals or companies. Investment scams that target specific groups, such as the elderly or religious or ethnic communities, are also common.

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