What is Stock Fraud? Everything You Need to Know

stock fraud
06
Jun
stock fraud

What is stock fraud, and how can you avoid it?

The world of stock fraud can be very confusing, and it’s easy to not realize that you’ve been part of a fraud situation until it’s too late. Although rules and regulations exist, the way you define fraudulent in the stock world is different from other types of fraud. It’s important to know what to watch out for so that you can protect yourself as an investor.

In this guide, we’ll give you a breakdown of some of the top types of stock fraud that you should avoid. Keep reading to learn how to keep your investments safe!

1. Penny Stocks

You may very well have heard of penny stocks, but did you realize that they’re often a type of stock fraud?

There is actually a great deal of fraud history in the penny stocks market, yet investors keep getting involved. The promise of getting stock in a start-up with wild potential is enticing, and since you can buy a lot of shares without much money, you get to feel like a major investor.

Many people will opt to buy more shares of penny stock, rather than fewer shares of stock with “real” value. However, the promise of the penny stocks is largely false.

There isn’t much oversight with these low-value stocks, which makes them very attractive to fraud artists. They often buy a lot of penny stocks, spread false information about their value, and then profit when people swarm to buy the stocks. Some people even create false companies and sell the stocks, even though no earnings or operations are actually underway.

Even the best investors have a hard time making money with legitimate penny stocks. You’re better off with the more expensive (but proven) stock options.

2. Prime Banks

This type of stock fraud appeals to people who think there are stock market secrets that have allowed investors to become mega-rich.

The concept of prime banks hinges on the idea that these secret investment opportunities are only available to a few privileged people. Scam artists promise that when you become a “privileged investor,” you too will have access to these “prime banks” and all of the profits that come with them.

However, there’s just one small problem: prime bank securities don’t actually exist. There are a number of other names that the same kind of stock fraud can fall under, but the idea is always the same – the promise of absurdly high yields from secretive sources.

If the source can’t be verified, its claims of high-yield stocks are probably false. There aren’t really stocks that are set aside for privileged investors, so avoid any promise that sounds like you’re joining an elite club.

3. Institutionalized Fraud

Yes, stock fraud can even be institutionalized. A bull market often creates a too-permissive culture that leads to irresponsible practices and even fraud.

While money’s coming in and the markets are rising, most investors are willing to turn a blind eye to fraud. However, when the market falls, hindsight is often 20/20 when it comes to realizing that fraud occurred.

For example, accounting fraud often doesn’t get caught when everyone’s making lots of money. Institutions and insiders can also be given unfair mutual fund privileges that give them major advantages, such as late trading. Researchers might form lucrative partnerships with investment banks that lead them to promote false information or withhold information.

However, investors often aren’t aware of this potential for bias. Just because an institution is profitable and large doesn’t mean it’s trustworthy.

4. Unlicensed Agents

Scam artists often use the promise of high commissions to get people working as sales agents, even though they aren’t licensed. These independent agents operate without much oversight but seem trustworthy because they’re often experts in the field.

Even though they are experts in some aspects, they don’t have the qualifications necessary to avoid fraud. If your agent promises high returns and low risk on strange-sounding investments, such as equipment leases, be wary. You might feel like you can trust your agent, but that doesn’t mean they’re really an expert.

5. Affinity Groups

Affinity groups also use trust as the foundation for fraud. Scam artists will exploit your professional identity, age, sexual orientation, cultural affiliations, and more to get you to trust them. After all, humans are naturally inclined to trust people who are in their “group.”

These scam artists will find a trusted group member or leader and get them involved in selling a fraud to the rest of the group. They promise that the profits can be used to benefit the group’s organization, such as a church or club. The leader gets involved in the fraud with the best of intentions.

Seniors, in particular, tend to be major targets for fraud. They often have major assets since they’ve been investing for decades, and may seek high-return investments to keep up with medical bills and increased lifespans.

6. Stock Brokers

When you get your brokerage statements, be sure to look for any unauthorized trades, odd fees, or other irregularities. Your broker might also recommend investments that really aren’t right for you. Even if you have a broker, it’s important to educate and protect yourself as much as possible.

7. Promissory Notes

These short-term debts are issued by false companies and typically sold by independent agents. They come with “guaranteed” above-market returns and the promise of low risk.

However, there are no guarantees in the stock market, and above-market interest rates are something to be wary of. You should also be cautious of who is selling the investments: are they really working in their field of knowledge?

Have You Been a Victim of Stock Fraud?

There are many different types of stock fraud, and they tend to be hard to avoid. Many of these scams look like trustworthy investments and come from trustworthy sources. Even major institutions have been found guilty of fraud.

Sometimes, even your best efforts to avoid scams can fail. Do you need a stock market attorney to help you? Contact us now.