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Friday, March 8, 2013

Investment fraud: Desperate times cause desperate measures

Annual investment fraud costs $10-$40 billion per year according to FBI data
Investment fraud misleads and misinforms unsuspecting investors

By Kellie Dennie
Investment fraud concerns deceptive practices pertaining to stock, commodities and other markets. The activities of those perpetrating this type of fraud are designed to induce unsuspecting investors to agree to purchase and make sale decisions based upon false information. These illegal and unethical activities usually result in extensive financial losses for victims. In times of economic downturn, extensive financial fraud investigations have become quite customary. Ironically, it is often these illegal financial schemes that contribute to the economic crises themselves.

Types of fraud

The Federal Trade Commission states securities regulators and the FBI have estimated that U.S. investment fraud range from $10 to $40 billion each year. It is also surmised that from $1 to $3 billion is attributable to stock fraud and manipulation. In addition, financial fraud also pertains to the following illegal activities:

a. Theft by way of embezzlement
b. Misstatements on financial reports
c. Fabricating information to corporate auditors
d. Insider trading
e. Front running
f. Illegal trading and stock or commodity exchange acts

Perpetrator tactics and characteristics

Any investor may become a victim of investment fraud. However, most often it is people over fifty who are affected the most, whether through direct or indirect investment purchases. In these cases, tax authorities, creditors and employees are also negatively affected and experience losses from financial fraud activities. Investment fraud attorneys will be able to access the individual’s situation to determine whether or not fraud has been committed.

Perpetrators of investment fraud within a publicly traded firm can include any attempt to manipulate financial or payroll accounts in order to:

a. Exaggerate assets
b. Under-report expenditures
c. Overstate earnings or revenue
d. Minimize reliabilities
e. Downplay risks

Fraud prevention

Even when an investment professional comes very highly recommended, each person should always perform their own reference checks prior to entering into any type of business relationship. One of the reasons that the infamous Bernie Madoff was able to perpetrate so much fraud was that he acted as his own broker and dealer. Therefore, using an outside custodial financial firm is advisable to assist with accountability.

Regardless of how recommended or established a financial adviser or broker may be, clients must ensure that their portfolios are monitored properly. For those who are less than financially adept, a trusted friend or family member may be able to help with this. As the cliché goes, any deal that seems to be too good to be true probably is. If something does not seem right, question it. 

Clients have every right to understand how their money is being handled. Any adviser or broker who appears bothered by inquiries may not be someone that deserves trust. For example, any type of excessive return in comparison to a benchmark should be monitored. In the past, unscrupulous brokers have absconded with funds that were gained from high short term returns.

Economic considerations and recovery

Due to the progression of multiple market events from 2006 to 2007, investment fraud and securities class action lawsuits rose as much as 43 percent. For example, the backdating scandal in 2006 and sub-prime crisis of 2007 were contributing factors to the explosion of fraud cases.

Attempting to recover asset losses from financial fraud is a resource and labor intensive endeavor, not to mention costly. This is due to the cleverness of fraud perpetrators who use intricate money laundering schemes to conceal funds. Also, their tendency to be reckless spenders makes it even more difficult to prosecute these criminals. Due to the complex nature of investment fraud, anyone suspecting that they could be a victim should enlist the services of a competent attorney who is very familiar with these types of cases.

About the author: Kelly Dennie is an investor, Realtor, and freelance writer. Page Perry LLC investment fraud attorneys litigate against securities brokerage firms, investment advisors, and their representatives that act unfairly and not in good faith in all exchanges. With any investment, you must be informed of material facts, risks and costs involved. As an investor, you should know your rights, investment objectives, and timelines before speaking with an advisor.

Image credit: IsaacMao; CC BY 2.0