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Financial Fraud Lawyers

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Investors may benefit from a consultation with financial fraud lawyers. Cases involving the sale of securities deal with a specialized area of law. These cases are often not criminal, but investment contracts may prevent investors from suing in civil court.

The securities industry is overseen by two regulators, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The SEC deals with civil actions and FINRA provides its own platform for settling investor disputes, called FINRA arbitration. The attorney general may pursue criminal charges in parallel actions.

Our business fraud lawyers can guide you through FINRA arbitration, the process most frequently used for the resolution of investment disputes. Financial fraud lawyers can evaluate the circumstances surrounding your losses and determine whether you should pursue arbitration. They can also effectively present your case – financial fraud can be complex, and it may take an experienced lawyer to spot the signs.

Red Flags of Financial Fraud

FINRA has issued a warning concerning investment fraud online that claims to use Artificial Intelligence. AI is a trendy topic, and scammers often attempt to capitalize on investment trends that may give their frauds an air of legitimacy.

FINRA also warns of high-pressure sales tactics, guaranteed returns, and any promises of a high return with no risk. These are strong hints that the “investment opportunity” is a fraud.

Unregistered Brokers and Unregistered Products

Many cases of financial fraud involve scammers posing as representatives of financial institutions. These scams may peddle offers of Forex investments, precious metal securities, and cryptocurrencies. Do not invest in anything based on an unsolicited call from a stranger.

How to Check a Financial Professional’s Registration

Lawyers for fraud cases recommend that investors always check the registration of any financial professional before investing. You can look them up by name, or by using the more precise Central Registration Depository (CRD) number. Their profiles will reveal any records of alleged misconduct or allegations by securities industry regulatory authorities. Profiles also feature information on what type of products the registered individual is licensed to sell.

What Can I Do If I Worked with an Unregistered Individual

Unfortunately, Kurta Law’s investment fraud lawyers cannot help investors with every type of financial fraud. Our attorneys only take on cases involving alleged misconduct by FINRA-registered brokers. If you have a complaint involving fraud by an unregistered person, you can call your local police department’s non-emergency line and contact the Federal Trade Commission at 1-877-FTC-HELP.

How To Check an Investment Product’s Registration

FINRA advises investors to review an investment’s registration but also offers this essential caveat: “Keep in mind that registration with the SEC does not guarantee that an investment will be a good one or immune to fraud. Likewise, a lack of registration does not mean the investment lacks legitimacy. The critical difference is the extreme level of risk you assume when you invest in a company about which little or no information is publicly available.”

FINRA Imposter Frauds

Scammers posing as FINRA employees have called unsuspecting individuals with information about supposedly “guaranteed” returns. FINRA wants investors to know that regulators will never solicit you for an investment. Fraudulent phishing emails have come from supposedly official FINRA addresses, ending in “@finra.eu” or “@finrarec.com.”

Common Law Fraud in Investor Disputes

Investment and fraud attorneys frequently review investor disputes that allege a broker engaged in “common law fraud.” “Common laws” refer to laws based on a judicial consensus rather than specific laws. This common law is formalized by federal securities laws, including SEC Rule 10b-5. SEC Rule 10b5 specifically prohibits manipulation in the sale of securities.

Ponzi, Pyramid, and Pump-and-Dump Schemes

Plenty of investors have found themselves victims of fraud after working with legitimate financial professionals. Ponzi schemes, pyramid schemes, and pump-and-dump scams are some of the most frequently cited types of fraud in SEC enforcement actions and FINRA arbitration awards.

Ponzi Schemes

Ponzi schemes are promoted by scammers who purport to have an incredible investment opportunity. When these fraudsters receive funds from investors, they typically use the funds to support their own lavish lifestyles and do not invest the money as promised. Ponzi schemes often overlap with affinity schemes, which target a particular religious or ethnic group and exploit the trust within the group.

In a 2013 enforcement action, the SEC alleged that a Columbian-American woman targeted members of her community, soliciting them for investments in supposed immigration bail bonds. The Direction of the SEC’s Miami Regional Office states, “[She] deliberately misled investors into believing their investments were safe and secure when in reality she was lining her own pockets. Here predatory scheme exploited the trust and friendship of members of her own community by using empty promises to convince them to trust her with their hard-earned savings.”

Pyramid Schemes

Pyramid schemes involve recruiting individuals for an investment or business opportunity that begins with an initial buy-in. The buy-in pays the recruiters, and a portion of their earnings goes toward the recruiters above them, as the money moves up the steps of the pyramid. Instead of focusing on a product or a real investment, the scheme’s profits come from buy-ins from new recruits. To sustain itself, the pyramid scheme must constantly recruit new members. Once the pyramid scheme runs out of new recruits, the scheme collapses the more recent recruits are left with nothing to show for their initial investment.

The SEC issued a warning that certain multi-level marketing companies have operated as illegal pyramid schemes. Investors should always conduct their due diligence and make sure they understand the payment structure and business model before making any payments.

Pump-and-Dump Scams

Pump-and-dump frauds have seen a rise in popularity, thanks in part to social media. In a typical pump-and-dump, influencers with significant social media platforms will promote a certain low-price investment to their followers. With more interest in the stock or crypto token, the price increases. Once the price has significantly increased, the promoters sell their shares, leaving the new investors with nearly worthless investments.

In December 2022, the SEC charged eight individuals with a pump-and-dump scheme, claiming that seven of the alleged perpetrators had cultivated social media personas to persuade their audiences that they were successful traders. When prices rose, they reliably sold their shares, conveniently failing to inform their audiences that they had done so. These fraudulent trading practices allegedly resulted in profits of $100 million.

Anti-Money Laundering Laws and Fraud

FINRA and the SEC have rules in place designed to catch illegal money laundering. FINRA Rule 3310 requires brokerage firms to have supervisory systems in place in order to catch the signs of money laundering, such as structuring. “Structuring” is a means of evading reporting requirements by breaking up large cash deposits into deposits of less than $10,000. Financial institutions are required to report transactions of $10,000 or more, so these smaller deposits are meant to help the deposits go under the radar. Financial institutions are supposed to catch these suspicious deposits and report them to the Financial Crimes Enforcement Network (FinCEN).

Suspicious transactions are often crimes with a bevy of clues. Under the Bank Secrecy Act, financial institutions are also required to report clues that a customer is attempting to conceal their identity. FINRA fined brokerage firm SoFi Securities $1.1 million following allegations that the firm had failed to report the following signals that a customer had a motive to hide their identity:

  • An applicant provided information, such as a telephone number or residential address, that was inconsistent or in conflict with other available information;
  • The applicant provided the same address and/or telephone number associated with another unrelated account;
  • The applicant had no credit history;
  • The applicant used a Protocol (IP) address to apply for the account that was over 100 miles from his/her residential address.

Illegal Insider Trading

Individuals connected with a company are not allowed to use non-public information to execute trades. This type of trading is known as illegal insider trading. For instance, a company insider may have knowledge of an upcoming merger or quarterly earnings report, one that may impact the price of a stock. Insiders are not allowed to use this non-public information to execute a fraudulent transaction.

For instance, in 2023 the SEC announced that charges against a broker and his friend who allegedly accessed non-public information regarding mergers and acquisitions from his girlfriend’s laptop while she worked from home during the pandemic. They allegedly used this information to purchase call options on several companies ahead of their announcements. (Call options are contracts that give the owner the right to purchase shares for a particular price at a specified deadline, provided the stock price reaches an agreed-upon threshold.)

The broker allegedly made more than $730,000 from the illicit trading, and the broker’s customers also allegedly earned millions of dollars based on the insider information.  

SEC Rule 10b5-1 and Affirmative Defenses

SEC Rule 10b5-1 specifically addresses insider trading and provides an affirmative defense for insiders who buy or sell shares of their company’s stock. This rule allows insiders to sell a predetermined number of shares at a certain time for a specified price. The SEC also recently amended this rule to include a cooling-off period – insiders must wait for a certain amount of time after adopting a 10b5-1 plan before executing trades according to the plan’s rules. If an employee suspects a fraudulent transaction, attorneys can help them earn SEC awards through the SEC Office of the Whistleblower.

Other Forms of Stock Market Manipulation

There are a variety of trading tactics designed to drive up stock prices, in addition to insider trading and pump-and-dump schemes. Stock market manipulation may include tactics like painting the tape, which entails traders who own large amounts of shares buying and selling securities from each other. Increased trading activity in a particular share signals to the market that there is increased demand, which subsequently drives up the price. Similarly, marking the close involves placing orders for particular shares at the end of the trading day, driving up the closing price for a stock. Orders placed at the end of the day have a more significant effect on the stock’s price.

How Do I Know if My Broker Has Engaged in Manipulative Trading?

A lawyer for investment fraud cases can review patterns of trading and make effective presentations to FINRA arbitration panels that demonstrate manipulative trading has taken place.

Unauthorized Withdrawals or Misappropriation

Unauthorized withdrawals from an investment account may prompt a call to a financial transaction attorney. Brokers may claim they are making withdrawals in order to help investors pay bills or run errands, only for investors to later find out that the funds were misappropriated (stolen). Elderly investors are particularly vulnerable to this type of fraud.

Contact Kurta Law Today

If you believe you suffered losses as a result of broker fraud or misconduct, contact our investment fraud law firm today. Call (877) 600-0098 or email info@kurtalawfirm.com.

Our financial lawyers offer free case evaluations and do not collect any fees unless they win your case. Financial fraud can take many forms, and Kurta Law fraud attorneys can help you determine if you have a claim.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.