What is Securities Fraud?

Otherwise known as stock or investment fraud, securities fraud is a serious white-collar crime that takes many forms and involves misrepresenting the information that investors use to make investment decisions. Whistleblowers who report undisclosed information to the U.S. Securities and Exchange Commission (SEC) regarding securities fraud are granted protection from employer retaliation and may receive a portion of any financial recovery made by the SEC. If you have inside information regarding violations of federal securities laws, it may be in your best interests to contact a securities fraud lawyer to speak in private about the evidence you have.

Defining Securities Fraud

Securities fraud refers to a broad range of illegal and unethical activity that involves investment markets and the misrepresentation of information that investors use to make decisions. Individuals committing securities fraud may provide false information, offer bad advice, withhold important information, and act on or offer inside information in order to manipulate investors and financial markets for their own benefit.

Securities fraud harms investors and the integrity of our country’s financial markets and economy. Securities fraud can be committed by groups or organizations like brokerages, as well as by individuals such as stockbrokers. Common examples of illegal activity in securities fraud lawsuits include:

  • Ponzi and pyramid schemes: A Ponzi scheme or pyramid scheme is a scam that generated money from new investors for previous investors. Characteristics of a Ponzi scheme include high returns and little risk, as well as consistent return flow regardless of market conditions.
  • Hedge fund fraud: Hedge fund fraud refers to any type of financial misconduct committed by or for a hedge fund. Types of hedge fund fraud scams include false guarantees of high returns, advanced fee schemes, embezzlement, and the operation of Ponzi schemes.
  • Advance fee schemes: In advanced fee schemes, investors are asked to pay an up-front fee. Scammers may describe it as a deposit, administrative fee, processing fee, underwriting fee, or tax. Be aware of any unsolicited investment offers, because it could be an advanced fee scheme.
  • Broker embezzlement: Broker embezzlement is a form of stock broker fraud and occurs when a broker obtains an investor’s assets legally and then uses the assets for unintended, unauthorized, undisclosed, or personal purposes. Types of broker embezzlement include outright theft, unauthorized trading, and excessive trading.
  • Late-day trading: Late-day trading refers to the illegal practice of recording trades that are made after the market closes as having happened before a mutual fund’s daily net asset value (NAV) calculation. Late-day trading is an illegal practice that is most often performed by hedge funds but differs from after-hours trading.
  • Foreign currency fraud: Foreign currency scams, also known as forex scams, occur when scammers seek to defraud traders by promising high returns by trading in the foreign exchange market. Signs of a foreign currency scam include promises of unrealistically high returns, unnecessarily complex jargon, and pushy brokers.

Securities Fraud Warning Signs

Securities fraud can be hard to detect without access to inside information, so the SEC counts on whistleblowers to help stop fraud that hurts investors. Because securities fraud takes many forms, the warning signs may differ between different types of scams. Common warning signs that an individual or organization may be involved in securities fraud include:

  • Unsolicited investment offers: Unsolicited investment offers or sales pitches, including cold calls, emails, or in-person offers, are frequently seen in fraudulent investment schemes. Unsolicited investment offers can come from strangers or someone you know, such as a coworker or friend.
  • Seller inquires about personal information: Salespeople or stockbrokers who request personal information, including bank account information, are often a sign of an investment fraud scheme. Additionally, never send a check by mail to an alleged stockbroker or salesperson.
  • High-pressure sales tactics: Fraudulent investment schemes often employ pushy salespeople and use high-pressure sales tactics to manipulate investors into making quick decisions. Legitimate stockbrokers understand that clients need time to think over investments prior to making a decision.
  • Offers that sound too good to be true: Promises of high rates of returns and quick profits are among the most common signs of a securities fraud scam. In general, investments that offer high returns are inherently high risk. Most of the time, when promises are made about investments. it is likely to be too good to be true and should be regarded as a red flag.

The SEC Whistleblower Program

After the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted to help protect consumers from predatory financial practices. Referred to as the Dodd-Frank Act, this bill established the SEC Office of the Whistleblower, which offers whistleblowers who provide valuable information regarding securities fraud a portion of any financial recovery. The SEC whistleblower program also offers protections against employer retaliation and allows whistleblowers to remain anonymous when filing a securities fraud claim.

The SEC encourages potential whistleblowers to report instances of security fraud that have already happened, are currently happening, or which are going to happen. When a whistleblower reports information regarding securities fraud that leads to the government making a financial recovery, the whistleblower is entitled to a reward of between 10 and 30 percent of the total amount recovered.

Remain Anonymous when Reporting Security Fraud

Potential whistleblowers are often apprehensive about reporting illegal activity like securities fraud for fear of employer retaliation. Unlike other government programs that reward whistleblowers for their information, the SEC allows securities fraud whistleblowers to submit a claim anonymously if they have retained an attorney.

Additionally, the Dodd-Frank Act protects whistleblowers from employer retaliation. The SEC states that employers cannot fire, demote, suspend, harass, or discriminate against an employee in any way for taking whistleblower actions.

Learn More about Securities Fraud from a Lawyer

SEC whistleblowers who provide valuable information regarding violations of securities law could receive a significant whistleblower reward if the information they provide leads to a successful financial recovery. Multiple securities fraud whistleblowers have been rewarded with SEC whistleblower awards of over $100 million.

If you are considering becoming a securities fraud whistleblower, an SEC whistleblower attorney can guide you through the legal process and assist you by helping you draft and file an anonymous claim, communicate with SEC lawyers on your behalf, and help you file for an SEC whistleblower reward for your bravery and contributions.

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