Investment Loss: Is It Due to Market Conditions or Broker Misconduct? Find out Here!

securities fraud
18
Dec
securities fraud

The stock market is a volatile ecosystem at the best of times. Some years, investors lose trillions of dollars. At other times, the majority of investors turn a profit.

Part of the confusion is due to the complexity of the stock market. Investing in stocks has always been a specialist’s endeavor, requiring an understanding of both individual industries and the greater economy. This specialization makes rocket science seem simple in comparison in today’s rapidly shifting economy.

Are you wondering what forces are at work that causes even expert traders to lose money in the stock market? Today we’ll be focusing on securities fraud and the impact they have on the stock market.

Securities Fraud Vs. Market Conditions

The stock market has been quite a roller coaster ride in the 21st Century. Despite a few calamitous crashes, however, the Dow Jones average is at an all-time high. It’s over 10x what it was worth in December 1953.

With so much money to be made, it’s no surprise there’s no shortage of stockbrokers and investment firms as well. There were 630,132 registered financial representatives as of 2017, conducting over $36 billion in transactions each day.

Unfortunately, not all of these traders and firms are operating in good faith. Sometimes they try and game the system using a handful of different methods. This is known as securities fraud and it’s a serious white-collar crime.

Let’s dig into the specifics of the common kinds that are seen most often.

What Is Security Fraud?

Security fraud can be committed by any financial representative. The term covers a wide array of behaviors, but the FBI defines security fraud as an attempt to deceive investors or attempt to manipulate the stock market, such as insider trading. This is done in an attempt to convince investors to buy stocks and bonds they wouldn’t otherwise purchase.

The Securities and Exchange Act of 1934 created the Securities and Exchange Commission (SEC), which is responsible for ensuring the compliance of financial organizations. This gives investors the right to sue when security fraud is expected.

Now let’s look at some of the most common types of security fraud, to help you recognize them when you see them.

Penny Stocks

The idea of investing in the next Google or Microsoft for fractions of a cent is ultimately alluring. Many new investors place their funds in penny stocks every single day, in search of this elusive goal.

Penny stocks are the definition of ‘quality over quantity’. Many newer investors are attracted to getting thousands of shares of a stock in a questionable company, rather than one or two more stable investments. The only trouble is, there’s no telling how valid those thousands of stocks might be.

Many penny stocks – which are also known as ‘micro-cap stocks’ – don’t meet the minimum requirement for SEC reporting. A lack of information disclosure and regulatory oversight make penny stocks ripe for exploitation.

Unlicensed Agents

Internet scammers use the promise of high commissions to entice independent agents and financial advisers to commit security fraud for them.

Independent agents make the perfect foils, as they likely already have the investors trust. They might also lack the resources to perform the necessary due diligence. This makes them ripe for exploitation.

As a general rule, beware of investment advisers who offer high returns with little risks. Also, just because you trust or like somebody doesn’t make them an investment expert.

Institutionalized Security Fraud

There have been many instances of large-scale investment fraud in the 21st Century. Sometimes it’s so big and so egregious it escapes notice unless someone starts digging.

There are several types of institutionalized security fraud in common practice. Let’s take a look at some of the most common.

Accounting Fraud

Accounting fraud is one of the best-known forms of investment fraud due to some high-profile cases in recent years. The crashes caused by Enron and WorldCom were all caused by creative accounting in enormous multinational corporations.

Normally there are oversight committees to catch these types of stock fraud, but during raging bull markets, they may get overlooked until it’s too late.

Questionable Mutual Fund Practices

Mutual funds are prone to all manner of abuse due to insider trading practices, which is another form of security fraud. Since the late ’90s, front-running and late-trading have been prevalent in mutual fund traders. This offers a sizable edge to large investors, putting regular stockholders at a disadvantage.

Conflicts Of Interest

Capitalism operates under the premise of free markets. Conflicts of interest put this entire premise at risk, yet they are not uncommon in the stock market.

Conflicts of interest arise when lenders and brokerage firms exist within the same financial institution. Investment recommendations may be corrupted by corporate interests at the expense of the investor.

How To Avoid Security Fraud

These are just a few of the many, many different types of stock fraud on the market. There are bound to be more as the stock market continues to evolve and become more complex.

Some signs of security fraud to watch out for include:

  • If an offer sounds too good to be true
  • If the investor being too pushy
  • If the offer was unsolicited
  • If the seller asks for personal information.

There’s a ton of opportunities for savvy investors out there. Things are changing, each and every day, in new and exciting ways. Securities fraud makes it difficult to take advantage of these opportunities, as you don’t know who to trust.

Weeding out this type of fraud makes the market better for everybody.

Have You Been The Victim Of Investment Fraud?

You’re not alone! Thousands of private investors get taken advantage of by unscrupulous agents every year. Luckily, if you have been the victim of securities fraud, you can do something about it.

We specialize in helping our clients take action in the case of investment fraud. Check out our listings of stockbroker misconduct services, and let us help you find justice.