Protecting Yourself from Federal Securites Fraud

Securities are a prime target for fraudsters. That is, those markets combine both ambiguity and high investment capitals.

If you’re an investor, you should protect yourself from those people (or companies).

You want to ensure that the stocks you buy are safe, regulated, all while providing good returns.

Below, we’ll help you with that. We’ll discuss securities fraud, its most common types, while providing some examples!

What Counts as Securities Fraud?

It’s any type of fraud that occurs on the stock market. Its goal is to trick investors into schemes that aren’t profitable.

Securities fraud can also include unfair investment choices. A common example would be manipulating markets based on insider information.

How Are Securities Frauds Prosecuted?

Securities frauds are almost always prosecuted as federal crimes, done through the SEC (U.S. Securities and Exchange Commission).

Convicted felons are punished with 5 years in federal prison for each fraud instance. Securities fraud is punishable for up to 20 years.

Felons are also charged a fine, depending how much was gained. Fines can reach up to $5 million.

What Are Its Most Common Types?

Securities frauds include the following:

Pump and Dump Schemes:

This type of fraud focuses on artificially jacking up a stock’s price for quick profits.

This is usually done by investors with enough purchasing power to affect a stock’s price.

Pump and dump schemes often come with aggressive marketing. The investors will try to hype up the inflated price as a norm.

After getting enough demand for the stock, investors will slowly start to “dump” it.

From there, the stock will crawl down to its pre-scheme level – often as a loss to those who bought into it.

Now, safeguarding yourself from pump and dumps is easy. Simply never chase a stock that had a drastic price increase in a short time span.

Inquire about the causes. Ask your broker for advice, and try to explore the financial statements of that company.

On the topic of financial statements…

Accounting Fraud:

This is what’s normally imagined when security frauds are brought up.

Accounting frauds happen when a listed company lies about its books to SEC, investors, or the world at large.

The most popular example of that is Enron.

Once a high performing stock on Wall Street, the company went bankrupt in 2001 with over $74 billion in losses to shareholders.

The losses weren’t just hard on the investors. They also hit employees hard, who lost billions of pension benefits from that scandal.

Ponzi Schemes:

Ponzi schemes create membership clubs to scam new individuals. The only difference is in how they operate.

Ponzi schemes are run through hedge funds. They’ll attract investors, while being vague about the assets they’re trading.

They can also be run by large companies with little sense of remorse.

Mortgage funds help schemers hide and justify their losses. Obviously, those won’t be stock losses, they’re what the fraudsters get away with.

One example was MMM, a Russian company that started one of the world’s largest Ponzi schemes in the 1990s.

The company attracted between 5 and 40 million investors – causing losses of up to $10 billion after the bubble burst.

Pyramid Schemes:

Similar to Ponzi schemes, pyramids operate on a membership basis. Only difference is, they heavily rely on them.

With a pyramid scheme, fraudsters promise a high return to investors from trading – in a fixed time period.

Only difference is, those returns are paid from the fees of new members. The new members then receive their returns from the funds of newer members, and so on.

This is unlike a Ponzi scheme, whose value comes from lying to authorities, cooking books, and artificially inflating stock prices.

Pyramid schemes collapse when funds from incoming members aren’t enough to pay the older members.

They’re quite unsustainable over a long period of time, and for that reason they’re not common.

How Do I Protect Myself From Securities Fraud?

The best way to protect yourself is to avoid a bad deal before it happens.

There are many ways to do so. They include:

Beware of Aggressive Sales Tactics.

Security fraudsters are always on the hunt for new prospects – especially fraudsters those that run pyramid schemes.

Also, fraudsters are more desperate than you think.

If a company or “broker” is too eager to sell you a deal, we recommend distancing yourself from them.

Do Financial Statements Match the Value?

While there are cases were financial statements misguide investors (like Enron) – most statements can help you detect a fraudulent deal.

This applies to pump and dump schemes. If you see a stock shooting up in price, try to see if financial statements match the inflation.

If they don’t, check news sources to see if a stock has a major announcement that’s worthy of affecting its price.

If none of those are present, then you’re probably dealing with a pump and dump.

Consult Before Buying.

Don’t just consult one person.

Ask your brokers and investment advisors. See if they have information that justifies an investment you have in-mind.

Don’t forget to combine analyst opinion with your advisors’ opinions.

Make sure those you ask are licensed to sell securities. Also, make sure they have the market experience to tell good from bad deals.

Beware of Microcap Stocks.

Information is difficult to find on those. Microcap stocks often lack the popularity of larger stocks, and are mostly used for speculation.

Plus, being cheap stocks, inflating their prices is easy. Those stocks are always a lucrative market for low budget investors (who are usually inexperienced).

Before investing in one, contact you broker. Try to get as much info as possible before committing.

Final Tip: Know Your Rights

We’d like to note that the information presented here isn’t legal advice. It’s a guide for investors on how to safeguard themselves.

For the legal advice you need, you can always contact us. We’d be happy to represent you in court, or to advise you with the legality of offers you might receive!

It Doesn’t End There

Consider the previous schemes as the most common in the mortgage fraud world.

Fraudsters are crafty. And while the necessary precautions can drive them away, we always recommend knowing your rights.

That is, know what you’re responsible for financially, what other parties are obliged to inform you about, etc.

For the legal federal mortgage advice you need, you can always contact us!

Esfandi Law Group

Posted on May 19, 2021 in Federal Fraud

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