Hardly a week goes by without a new media story about financial fraud. Also known as stock, investment and securities fraud, the term covers a wide range of illegal and unethical deceptive practices in which investors – primarily those with little expertise or knowledge of markets and financial instruments – are duped into making decisions to buy or sell securities based on false information.
Fraud can also involve some kind of market manipulation. According to statistics from the Federal Bureau of Investigation, crimes involving financial fraud have been on a steady and alarming increase over the past decade. At the end of the fiscal year 2011, the F.B.I. was investigating well over 1,800 cases of securities fraud, resulting in nearly 400 convictions. Sadly – but not surprisingly – the rate of financial fraud grows as the value of stocks go down. Major law firms dedicate vast resources to investigating and litigating cases on behalf of clients who have lost everything due to a financial adviser’s carelessness or deliberate criminal actions.
Below are some of the more common types of financial and securities fraud; how to recognize them; how to avoid them; and what to do should you become a victim:
- If it sounds too good to be true, it most likely is. Overblown promises of quick, large, guaranteed returns on small investments are virtually always a scam. If you are approached on something of this nature, the wisest course of action is to consult your own financial adviser or certified public accountant.
- Beware of email solicitations, particularly from unknown parties. Almost everyone has heard from the infamous “Nigerian Prince,” or has received notice of winning lotteries they never entered or even heard of. However, fraudsters are using increasingly sophisticated methods to get through to their victims. Furthermore, the global nature of the World Wide Web has made it easier for criminals to target American investors. Your best defense is to simply delete any and all such solicitations from people you do not know. There is a caveat, here: such Internet scammers are known to hack into people’s email accounts. Therefore, it is possible to receive an email solicitation that appears to come from a friend or acquaintance. The good news is that such emails are relatively easy to spot: they usually contain a generic greeting such as “Hello, friend,” as well as a link to another page, with little or nothing in the way of a personal message.
- If someone asks for personal information up front, walk away. These requests generally come from people claiming to represent small, start-up companies, touting them as the next Microsoft or Amazon.com. Until recently, it was virtually impossible for non-accredited investors (those with annual incomes below $200,000 or who have under $1 million in assets – in other words, the vast majority of small investors) to get in on the ground floor of these opportunities. There was good reason for this; Securities and Exchange Commission rules requiring such investors to meet minimum requirements were intended to protect average investors from catastrophic losses, as such investments can entail a high level of risk. However, in March of 2015, the rules were changed in order to allow start-ups to raise capital from smaller investors. It’s a rule that can easily be abused by slick, manipulative salespeople in convincing unsophisticated investors to provide their personal financial information. This is not to say that legitimate opportunities of this kind don’t exist. However, if you are approached with this type of investment, you should be extremely wary. Make certain the opportunity is a legitimate one and that all parties involved are adhering to S.E.C. regulations. Furthermore, do not offer any unnecessary personal information until making the actual decision to invest.