Investment fraud is any scheme or deception relating to investments that affects a person or company. This occurs when a person or organization uses false information to make investment decisions, such as misrepresenting investment opportunities or failing to disclose the financial status of a company or any probable conflicts of interest.
The government tracks investments and works hard to prevent any and all investment fraud. That is why investment fraud usually involves nontraditional investments, in which there are fewer consumer protections and people may not be aware of risks involved. Examples of investment fraud are illegal insider trading, stock market manipulation, promissory notes, securities fraud, Ponzi schemes, and other criminal tax cases.
Ponzi schemes are the number one way investors are taken advantage of. Ponzi schemes, named for early 20th century scammer Charles Ponzi, is a strategy of convincing the public to put their money into fraudulent investments. Usually the scammer will provide some investors with an early return in order to give the illusion of a profitable investment opportunity and squeeze more money out of them. This is not a true return, but is usually the investment money of another victim. Once enough money is collected in the scheme, the scam artist will simply disappear with it.
There are two types of insider trading: legal and illegal. Any time a company employee or executive buys or sells stock in a company that they work for they are engaging in insider trading. The Securities and Exchange Commission (SEC) has stringent rules that regulate insider trading, and once those rules are broken the act becomes illegal. Essentially, once a person gains knowledge that can impact a company’s stock price, and acts on that knowledge for profit, they are engaging in illegal insider trading. Often times, a knowledgeable employee will inform a spouse or a friend of the impending news that may impact the stock market, and have them act on their behalf in order to steer attention away from the employee. In this case, both parties would be found guilty if caught.
Stock market fraud generally occurs in the form of what is known as “wire fraud.” Wire fraud is any fraudulent activity performed by a person or organization acting under false pretenses that takes place over interstate wires, including television, radio, telephone and computers. Usually, telemarketers or online spammers will make promising, often unprofitable claims of what may happen to the stock market. Another form of stock market fraud is wash-trading, which is when an investor will simultaneously buy and sell shares of the same company through different brokers in order to spark interest and hopefully give other brokers and investors the idea that something big is about to occur.
There are various other forms of investment fraud, and fortunately there are many ways to spot them. One indication that an investment opportunity may be too good to be true is extremely high sales pressure to act immediately, and refusal to give detailed information about the investment. The promise of unrealistic returns over a short period of time is another consideration of concern. Also look out for investors who ship money to “offshore secrecy” so that they can avoid paying taxes on “guaranteed returns.”
The SEC may investigate any individuals or corporations if they suspect a violation of laws and regulations. If found guilty of investment fraud, an offender will likely face criminal and civil penalties and charges. Judges often use a point system in order to determine the degree of the violation. They will typically consider the number of victims, amount of money involved and overall damages caused by the scheme. Penalties usually include prison time, fines and repayment of lost money or property. The SEC has a fairly long statute of limitations of 2-5 years to file a charge, so it is important to seek the legal advice of an attorney even if it has been years since a violation occurred.
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