Securities fraud is a broad term. It covers a range of criminal activities involving investments. As an investor, you must understand what securities fraud is and how it could affect you. Additionally, you must know when to call a securities attorney for advice.
Investors caught up in a fraudulent scheme could lose a lot of money. So, it is important that you take steps to protect yourself and understand the common warning signs to look for. Furthermore, you need to know a security law firm can help you take action if you are the victim of securities fraud. This guide will tell you everything you need to know to protect your investments.
How Is Securities Fraud Defined?
The definition of securities fraud is broad. The FBI describes it as any activity in which somebody misrepresents and misleads investors in order to manipulate financial markets for their own gain. For example, withholding information, giving deliberately bad advice and false information, or acting on inside information that other investors do not have access to.
This type of securities fraud can be committed by an individual like a stockbroker or private investor. In addition, it can be carried out by organizations like hedge funds, businesses, or investment banks. Insider trading can be carried out by anybody that shares or acts on information.
There are many different types of securities fraud. Investors need to be aware of this to protect themselves.
Different Types Of Security Fraud
Most brokers are reliable but there are some that will break their legal obligation to their clients. Some may commit securities fraud against them.
Encouraging margin trading is a prime example of this. In short, margin trading is a method of buying stocks with money borrowed from the brokerage. It can maximize profits but also amplify losses. However, the broker is making money regardless of whether you are making a profit. So, an unethical broker may encourage margin trading even if it is not in your best interests.
Brokers may also recommend investments that are unsuitable for your financial position or long-term goals. Often, these poor recommendations are made based on misleading financial predictions. This leads to losses when investments go bad.
Misleading you or omitting certain facts about an investment is also illegal. A broker has a responsibility to explain all of the risks involved with a certain investment. You can then make an educated decision about it. Knowingly failing to do that is considered securities fraud.
If you feel that your broker has acted unethically in any way and this has caused you to make financial losses, a securities lawyer can help you make a claim.
In some situations, the value of an investment drops due to corporate misconduct. This is considered securities fraud. The best-known example of this is the Enron scandal.
Enron, an energy company based in Texas, declared bankruptcy in 2001 and their stock prices plummeted. Consequently, shareholders lost a lot of money. After investigation, it was discovered that the board of directors were misled before the bankruptcy. Many debts were hidden using accounting loopholes. Therefore, shareholders did not have a clear picture of the health of the company when making investment decisions.
Shareholders contacted a securities lawyer and filed a lawsuit for $40 billion. Many high-level employees were investigated and charged. This led to the introduction of a range of new regulations about financial reporting for public companies.
Although regulations have changed, corporate misconduct lawsuits are still common. The most recent example being a lawsuit involving Plug Power. Its investors claim they failed to inform them they would not file their 2020 annual report.
Equity indexed annuities
Equity indexed annuities are complex financial instruments. They are sold using misleading tactics. The insurance agents that sell them may not understand what they are selling. They won’t explain the relative risks and rewards. Instead, they make general promises about safety and stability. Consequently, many investors believe that they cannot make any losses from an equity indexed annuity. Unfortunately, that isn’t the case. In fact, the majority of investors will make losses. If you believe that you were fraudulently sold one of these financial instruments, contact a security law firm right away.
High yield investment fraud
This is a common form of securities fraud.It is often run online but can occur over the phone as well. An investor is offered the opportunity of a lifetime with huge returns. Often, as high as 100% per day. They will also be told that there are zero risks involved. The person pitching will put time pressure and tell you that you will miss out on the opportunity if you don’t put your money in now.
In many cases, these opportunities are a front for a Ponzi scheme. These schemes work by continually bringing new investors on board. New investments are used to pay the ‘returns’ of the original investors. A Ponzi scheme orchestrated by Bernie Madoff is considered the largest incidence of securities fraud in history.
Advance fee fraud
Advance fee fraud is a relatively simple form of securities fraud. It involves being asked to pay upfront for financial instruments that you will eventually receive. Investors will be offered a substantial payout if they pay a small payment now. They are told this is to cover taxes or administrative fees. Once the advance fee is paid, the eventual payout never arrives.
Microcap fraud covers any activity where the stock of a company under $250 million market capitalization is falsely promoted. People that already have an interest in the stock will do this. The pump and dump scheme is the most common form of microcap fraud.
Pump and dump schemes are a way of manipulating financial markets by giving false recommendations about a stock. Therefore, people invest, which drives the price up. Fraudsters use chat rooms and online forums to post recommendations about a stock. They always claim to have carried out research. When the stock rises as a result of the false information, the fraudsters sell their position for a profit. A pump and dump scheme is considered to be securities fraud. Those caught running them are subject to large fines.
Boiler rooms are another method that is used to pressure investors into driving the price of a stock up. These large call centers use aggressive tactics and confusing language to convince investors that a stock price is going to increase. Many pump and dump schemes are now using online tactics. But investors should still be wary of calls from boiler rooms. If you suspect you have been contacted by one of these fraudsters, seek the advice of a securities attorney.
Short selling abuses
Short selling abuses come in different forms. In some cases, it involves the spreading of false information to drive down stock prices. Fraudsters can then maximize profit from the short positions they hold.
Naked short selling means selling short products without first borrowing the stock. In some cases, this does not cause an issue because the stocks can be recovered. But, in some cases, they cannot. If it is determined that somebody engaged in short-selling knowing that they may not be able to borrow the shares, this could be considered securities fraud.
Insider trading is a type of securities fraud that involves using illegal, non-public information. This can help make trading decisions and increase your profits. There is a legal form of insider trading, where key employees, officers and directors trade in a company stock. However, there are strict reporting rules in this instance.
How Can Investors Protect Themselves From Securities Fraud?
Research before you invest
Conducting research is essential if you want to avoid getting caught out by pump and dump schemes or Ponzi schemes. If somebody offers you an investment opportunity that sounds too good to be true, there’s a strong chance it is. Always do your own research into a company before buying stock. Then, you can ensure that you are making a sensible decision.
Know the seller
When you are purchasing any financial instruments, always know who the seller is. If you receive an unsolicited offer via email or over the phone, you should always be suspicious.
Seek legal advice if you are unsure
Even if you protect yourself, you may feel that you have been misled by a broker or caught out by some other form of securities fraud. In this instance, the best thing to do is get in touch with a security law firm. Speaking with an experienced securities lawyer will help you determine whether you have been involved in a fraudulent scheme of some kind. The number of lawsuits filed is increasing and plaintiffs have a strong chance of winning. But they must work with a reliable securities attorney. Taking legal action could help recover any losses. Fraudsters will be held accountable too.
Securities fraud is a serious issue for investors. However, if you are cautious and you seek legal advice when necessary, you can protect your investments.
Virtually all brokers and brokerage firms are regulated by FINRA (f/k/a NASD), and most allegations of fraud may be pursued under state securities statutes, the Securities Exchange Act of 1934, and FINRA rules. Many lawyers have a passing familiarity with certain aspects of these laws, but there are very few attorneys who possess a detailed appreciation for how these legal principles operate in conjunction with one another. Moreover, only a small percentage of lawyers have a genuine understanding of how the securities industry actually operates on a pragmatic level. Given his education and experience – combined with his impressive trial skills, Chris Bebel possesses a structural advantage over other lawyers. Consequently, he is uniquely situated to handle a wide array of securities fraud cases.
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(SECURITIES LAW EXPERT)