Investment Fraud

Investment Fraud

Investment fraud is unfortunately one of the most challenging concerns of today’s investors. This category of fraud also known as securities fraud or stock fraud influences investor’s (individual as well as institutions) trading decisions by creating an illusion for the people who are willing to acquire or sell certain securities. This illusion results from presenting deceptive and misleading information in financial statements of various companies and on Securities and Exchange Commission (SEC) filings. Information being scanned by investors for investment related decisions might be falsified by investment banks, brokerage companies, stockbrokers or dealers etc.

Investment fraud dates back to the origin of direct door to door selling campaigns and telemarketing. However these days internet has become another tool for portraying stunning pictures of ugly investments and provides a room for the investment fraud to blossom. Chat rooms, forums, internet boards and email (spamming) provide perfect place for broadcasting falsified good or bad news against certain investments.

For committing investment fraud there are various techniques being used in the market as mentioned below:

Ponzi Schemes

Near the beginning of 1920’s this scheme was successfully used by Charles Ponzi that derives its bases from the illusion of offering superior returns as compared to traditional returns being offered in the capital market. Hidden from investors, the finances coming from following investors are used to pay returns to preceding investors rather than paying from profits earned by investing in fruitful investment opportunities. There are no actual investments made.

Such scheme falls down when promised returns obligated to preceding investors exceed the money that can be accumulated from subsequent investors, operator runs off or the entire scheme is discovered by the legislative bodies. NASDAQ stock market’s former chairman Bernard Madoff, is notorious for causing the largest investment fraud of around $ 64.8 billion by means of Ponzi scheme.

Insider Trading

Trading of the financial assets (stocks, bonds, derivatives) of a company by the individuals who are insider to that particular organization like directors, CEOs holding above 10% of company’s shares provides another opportunity for committing investment fraud. This insider trading becomes illegitimate when insider gets access to confidential non-public information not available to the outsider that eventually results in abnormal profits for the insiders. People those are internal to a company sometimes also disclose non-public information to their relatives, friends or some other third party that is known as Tipping.

Pump and Dump

It is an extremely illicit practice where a tiny group of informed investors buy a stock and afterwards praise it to thousands of investors. The consequence of this is an artificial dramatic rise in prices (“pumping”) and when prices touch the peak the executors short sell the securities causing an equally striking decrease in prices (“dumping”). The companies with little float and that are over-the-counter bulletin board (OTCBB) mostly become target of pump and dump techniques as there is very minute information available about their stocks leaving them easily maneuverable. Another variant of this fraud is called short and distort (swindlers spread negative news to push the share prices down and seek huge profits through short selling).

Prime Bank Investment Scheme

The term prime bank refers to top fifty banks of the world that usually issue very low risk financial instruments like IMF bonds. This term is used by swindlers who claim to have memberships with highly privileged financial institutions like International Chamber of Commerce (ICC) and International Monetary Fund (IMF) to betray investors who are persuaded that their money will be invested to purchase financial instruments issued by “prime institutions”. Investors are advised by criminals to keep their identities and transactions secret.

Some other types of investment frauds are:

• Affinity Fraud
• Boiler Rooms
• Microcap fraud
• Exempt Securities Scams
• Forex Scam
• Mutual Fund fraud
• Wash-trading
• Match-trading
• Investment seminar scam
• Offshore investing
• Retirement account scam
• False prospectus

How to avoid an investment fraud?

• Look into all documents are legal
• Be cautious of high rates of return, it might be a Ponzi scheme
• Don’t promote an investment program on request