Securities fraud involves a stock or commodities market scheme to mislead investors. An individual or an organization can commit this white-collar crime. Those who achieve this act may face both civil and criminal liability. The main categories of securities fraud will be covered in this article.
High-Yield Investment Fraud
A High Yield Investment Program (HYIP) scam defrauds investors by promising annual (or even monthly, weekly, or daily!) investment returns of 30 percent or more — with little or no risk to the investor.
The perpetrators of a HYIP fraud may contact victims by telephone, email, or social media and claim to be brokers or investment advisers. In most HYIP cases, the alleged broker or adviser will have access to highly confidential information regarding the investor’s assets. It is a red flag and can be used to identify fraudulent activities.
Legitimate brokers and investment advisers are more than happy to provide documentation of the investments they offer clients. But really, what is securities fraud? It refers to a broad range of unlawful practices, all involving misleading investors or manipulating the financial markets. A common type of securities fraud involves promissory notes and other debt instruments.
Fraudsters use these fictitious instruments to lure investors into a Ponzi scheme by paying out previous investors with funds obtained from new investors. The fictitious debt instruments are ultimately worthless, and the duped investors lose money. A convicted HYIP fraudster recently received one of the longest prison sentences in history — 330 years!
Luckily, the victims of such schemes are entitled to compensation. While it can be challenging to recover the lost funds, a skilled securities lawyer can help. The courts can force the fraudster to hand over all ill-gotten gains through a process called disgorgement, and an officer of the court known as a receiver will hold and protect any monies recovered on behalf of the victim.
Pump and Dump Schemes
In pump-and-dump schemes, fraudsters artificially inflate the price of their stocks by spreading false or misleading positive statements. The goal is to increase demand so that they can sell their cheaply purchased shares at a much higher price. This investment scam is especially prevalent in penny stocks or other micro-cap securities.
The scammers spread false information through various means, including social media platforms, chat rooms, and online forums. They also employ multiple techniques, such as disseminating false news reports or claiming insider knowledge about the company, to magnify their message and instill a sense of urgency among prospective investors.
Once the stock prices peak, the fraudsters dump their shares into the market. It will cause the stock to crash, leaving unsuspecting investors with significant losses. The Securities Act and other relevant laws criminalize all types of fraudulent manipulation of stock prices, including pump-and-dump schemes.
Those involved in these schemes can face serious federal charges. If you have been accused of committing this kind of investment fraud, you must contact an experienced securities fraud defense lawyer immediately. This legal professional can provide valuable information about your options for defending yourself and can work with you to build the most robust possible case against prosecutors.
When Enron collapsed in 2001, it resulted from a series of seemingly unconnected schemes—some as simple as smoke and mirrors—that built a company on debt and reliance on the gullibility of investors. It ripped off California by selling energy at over-inflated prices, misrepresented its fledgling broadband operation to hitch its stock price to the stars of the Internet bubble, overstated the value of its international assets, and manipulated quarterly earnings statements to keep its share price up and Wall Street happy.
By early fall 2001, it was clear that some analysts were noticing problems with the company’s disclosures. One said his notes “don’t make any sense, and we read footnotes for a living.” Skilling and other executives created a bewildering array of unique purpose entities (SPEs) to hide the company’s declining financial picture. Each was capitalized with hard assets and liabilities, complex derivative financial instruments, and rights to issue the company’s stock.
These SPEs allowed Fastow to pay himself tens of millions in management fees that exceeded his salary at Enron. The resulting scandal shook the confidence of capital markets, destroyed thousands of jobs, and wiped out billions in pension funds. It also led to new regulatory measures, such as the Sarbanes-Oxley Act, which increased penalties for fraud and expanded reporting requirements.
Advance Fee Schemes
Every year, thousands fall victim to advance fee fraud, a scam in which victims are asked to pay an upfront or advanced fee for money or services promised but never received. Victims may be contacted by phone, email, or social media by a perpetrator posing as a wealthy individual, business representative, government official, or other legitimate source.
They are then enticed with promises of large sums of money or other monetary benefits they can receive in exchange for the upfront payment. These schemes often take advantage of unsuspecting victims who do not check out the legitimacy of the investment or the person claiming to represent it. They may also be subjected to high-pressure sales tactics by the perpetrator.
The scammers may also use “spam” emails to distribute the bogus offer, allowing them to target millions of people at once for much less than it would cost to call or mail them individually. Suppose you or someone you know has been accused of involvement in an advance fee scheme. In that case, criminal lawyers can help you defend yourself against allegations of fraud and prevent being imprisoned or forced to pay restitution.