The term “securities fraud” encompasses a wide range of improper and illegal practices. As an investor, you should know the red flags of broker misconduct to look out for when reviewing your account statements. Investing inherently involves a certain amount of risk. While you can expect fluctuations due to unforeseeable market forces, you should also look for securities fraud elements that may enable you to file a complaint with the U.S. Securities and Exchange Commission (SEC).
Unfortunately, securities fraud is a very real concern. Estimates put the annual cost of securities fraud in the hundreds of billions of dollars. Securities fraud can be devastating, and many investors lose their entire life’s savings to broker fraud.
So, what is securities fraud? Keep reading for our securities fraud definition, as well as insights from an experienced securities fraud lawyer about possible securities fraud litigation.
Securities Fraud Meaning
Anyone who maintains a brokerage account and works with a stockbroker could be the victim of securities fraud. The term “security” refers to a broad range of investment products, from stocks and bonds to initial coin offerings (ICOs). The SEC defines a “security” as “an investment of money in a common enterprise, with the reasonable expectation of profits to be derived from the efforts of others.” The term “fraud” refers to any type of act or omission intended to cause or that may cause financial harm to unsuspecting investors. But what is investment fraud in a real-life example? Let’s review a number of common complaints, including insider trading, Ponzi schemes, and other complaints that fall under the definition of securities fraud.
Securities Fraud: Elements of Securities Law Violations
Some of the most common securities fraud examples our securities fraud lawyers see include the following:
1. Misappropriating or Misdirecting Investors’ Assets
Misappropriation—i.e., theft— is a particular risk for those who invest through brokers and advisors. This applies to both cash and securities in investors’ accounts. Another similar form of securities fraud involves managers of employer-sponsored retirement plans misdirecting employees’ contributions to unauthorized accounts.
2. Insider Trading
Insider trading involves industry insiders using non-public information to make decisions about buying or selling a company’s stock. Corporate insiders–including executives, board members, accountants, and lawyers–can reap substantial gains from trading on inside information. They engage in this type of trading at retail investors’ expense. For example, the SEC recently charged a Goldman Sachs employee with using client information regarding account mergers and acquisitions to make trades in anticipation of these major corporate moves.
3. Providing False or Misleading Information
If a broker or advisor gives you false or misleading information about an investment product, you may be able to pursue a claim for securities fraud.
4. Omitting Material Information
Similar to providing false or misleading information, another common securities fraud involves omitting material information about an investment. A broker or financial advisor could omit information about a company’s risks, the risks associated with a particular investment strategy, a conflict of interest, or the fees a brokerage firm or advisory firm will charge. Brokers have an obligation to disclose all material risks associated with an investment.
5. Offering or Promoting Unregistered Securities
In the United States, the general rule is that all securities must be registered—unless a specific registration exemption applies. Exempt private placements, for example, have specific restrictions and cannot be marketed or sold to more than 35 accredited investors. (An accredited investor is usually financially prepared to take on significant risk.)
Offering or promoting unregistered securities and unsuitable investments that are not subject to an exemption is a form of securities fraud that has become more prevalent in recent years. Examples include the unregistered sale of equity interests in startup ventures and the promotion of unregistered ICOs.
6. Providing Unsuitable Investment Advice, Unauthorized Trading and Charging Excessive Fees
Providing unsuitable investment advice, unauthorized trading, and charging excessive fees are three common examples of broker and advisor fraud. Other examples include failure to diversify (overconcentration), failure to execute trades, forgery, and selling away.
7. Ponzi Schemes, Market Manipulation and Other Fraudulent Investment Scams
In addition to the various examples of securities fraud discussed above, fraudulent investment scams can also lead to significant financial losses for unsuspecting investors. Ponzi schemes, market manipulation, and pump-and-dump schemes are just a few of the numerous examples.
- Ponzi schemes: Brokers might represent that investor funds will go toward legitimate business endeavors, when in fact, the funds pay off earlier investors or simply line the fraudster’s pockets.
- Market manipulation happens when an investment insider artificially increases or decreases the price of a security. Laidlaw & Co. recently had to pay a fine after FINRA alleged that they failed to spot market manipulation. In this case, the manipulation consisted of buying or selling a trade near the end of the trading day to increase its price.
- Pump-and-dump schemes: Headline-grabbing examples of pump-and-dump schemes occur when celebrities or influencers encourage their fans to invest in a product, only to sell all their shares once the price has gone up. They leave many smaller investors with worthless or nearly worthless investments in their wake.
7 Examples of Companies and Individuals Who Commit Securities Fraud
What is securities fraud’s usual suspect? To better understand what securities fraud is, investors should examine who typically appears as the defendant in securities fraud cases. Investors who suffer losses due to securities fraud can potentially have claims against a variety of different parties. Our investment loss attorneys have filed claims against these parties and won. Here are a few examples of securities fraud being committed by individuals and companies:
1. Stockbrokers and Brokerage Firms
Many investors place their trust in stockbrokers and brokerage firms. Too often, they find that their faith has been misplaced. Stockbroker fraud is alarmingly common, with specific forms of fraud ranging from omitting material information about investments to engaging in conflict-of-interest transactions — many investments come with huge commissions for brokers and no benefit to the investors. Brokerage firms can face liability for their failure to supervise and vicarious liability for their brokers’ negligent and wrongful acts.
2. Investment Advisors and Advisory Firms
SEC-registered investment advisers must abide by the same securities laws as brokers. Claims against investment advisors can range from providing unsuitable investment advice to account churning and charging excessive fees.
3. Publicly Traded Companies
Publicly traded companies commit securities fraud when they release false or misleading information and withhold information that is material to investors’ decisions to buy or sell their securities. Securities fraud cases involving large publicly traded companies are not uncommon, and investors will be able to pursue collective or class action lawsuits in many cases. Investors who do not participate in class action suits can recover their losses with the help of a securities attorney and FINRA arbitration.
4. Private Companies
Private companies may commit securities fraud through unregistered offerings. While there are exemptions to the registration requirement (i.e., in the case of private placements offered to accredited investors), many private companies fail to take all the required steps to secure these exemptions.
5. Company Executives and Managers
Company executives and other corporate insiders can commit securities fraud by facilitating the publication of false and misleading information or by engaging in insider trading. Plan managers have committed securities fraud by breaching their fiduciary duties, misdirecting and misappropriating employees’ retirement assets, and failing to take appropriate steps to avoid plan losses.
6. Influencers, Public Figures and Community Leaders
The SEC has recently amplified its efforts to target celebrities, athletes, and other influencers who promote fraudulent investments online. Investors can pursue claims directly against these individuals in many cases. Cases involving securities fraud perpetrated by community leaders and other individuals who hold positions of trust and confidence are also, unfortunately, quite common.
7. Scam Artists
Finally, some individuals who perpetrate securities fraud schemes are simply scam artists. These individuals prey upon inexperienced and vulnerable investors, and their methods are becoming increasingly sophisticated. Securities fraud scams tend to share many of the same characteristics. For example, high-pressure sales tactics and promises of guaranteed returns often signal a fraudulent offering.
What Can You Do if You Are a Victim of Securities Fraud?
If you are reading this, you most likely have concerns about securities fraud. The following are actions you should take to fight for your lost investment.
- Gather Your Account Statements and Other Records – Gather your account statements and any other relevant records you may have—emails, direct messages, prospectuses, and any other forms of documentation related to the securities in which you invested. If you have concerns about broker or investment advisor fraud, try to locate a copy of your brokerage or advisory services agreement as well.
- Take Notes Regarding Your Concerns – Take some time to write down why you have concerns about securities fraud. When did you first begin to have concerns? What tipped you off? What communications have you had since then? The more details you can record, the better.
- Learn About Your Options for Recourse – If you are a victim of securities fraud, you potentially have a few different options for recovering your fraudulent investment losses. While it will be necessary to go to court in some cases, many aggrieved investors can seek to recover their fraudulent investment losses through FINRA arbitration. Speak with a securities fraud attorney to be sure you understand your options.
- Protect Your Remaining Assets – To the extent possible, you should try to protect your remaining assets. Your options for protecting your remaining assets (if any) depend on the nature of your investment and the fraud involved. If you have questions about what to do or how to do it, a securities fraud attorney will be able to help.
- Talk to a Securities Fraud Attorney – The first step toward recovering fraudulent investment losses is to speak with a securities fraud attorney to discuss the possibility of securities fraud litigation. Kurta Law offers free consultations, and if you have a claim for securities fraud, their securities attorneys work for a contingency fee. This means you only pay legal fees if your attorney helps you recover your losses, and your legal fees will be calculated as a percentage of the amount you recover.
Request a Free Consultation at Kurta Law – Speak with a Securities Lawyer Today
If you need to know more about pursuing a claim or still have questions, we encourage you to contact us promptly. To schedule a free, no-obligation consultation at Kurta Law as soon as possible, call 877-600-0098, or tell us how we can reach you via our live chat.