Investor fraud can come in a wide variety of forms, but the central theme is basically the same: you entrust your money to another party who you believe to be making the best investment decisions with it, but instead they betray your trust and take it from you.
The Financial Fraud Research Center estimates that annual losses to fraud can range into the tens of billions of dollars in the United States alone. Unfortunately, these estimates are probably even lower than the actual number, as fraud victims sometimes do not report the crime out of embarrassment or in the errant belief that nothing can be done about it.
In today’s post we’ll discuss some of the major forms of investment fraud that are commonly seen, and what you can do to recover some or all of your lost money.
- Ponzi Schemes
Bernie Madoff became the public face of the Ponzi scheme when he bilked clients for almost $65 billion dollars in total, setting the kind of record that you don’t really want to go into the history books for. What he did was the classic example of the scheme; instead of growing the investments of his existing clients, he simply paid them small dividends out of the investment money of a stream of new clients while also providing falsified reports indicating they were making more than they really were.
Madoff’s long-running scheme was brought down by an extended recession, but most smaller operators will simply take all the money they have on hand and vanish after a certain point. The scheme can also come crashing down unexpectedly if enough investors decide to withdraw their funds all at once.
Ponzi schemes are particularly insidious because they don’t necessarily start out as an attempt to defraud clients. Legitimate hedge funds sometimes turn to Ponzi tactics out of desperation if the fund doesn’t perform as well as expected. Regardless of the circumstances, however, it is illegal under California law and the operators can potentially do state prison time for it.
- Insider Trading
According to the law, you’re only supposed to make stock transaction decisions based on public knowledge, like company press releases or earnings statements. If you use knowledge that is only available behind a company’s closed doors to make a decision to buy or sell their stock, that constitutes insider trading (as this practice would destroy the viability of the stock market if it was legitimized).
Martha Stewart put a face on this particular form of investment fraud when she was sentenced for dumping shares of her investments in ImClone in 2001. Stewart had learned that the FDA was going to reject ImClone’s cancer treatment drug several days in advance of their public announcement, and used that knowledge to sell her stock before the public became aware and the company’s value plunged.
Unfortunately, if your investment or hedge fund manager is caught engaging in insider trading, it can cause problems for you. You won’t be charged for moves that they made with your money, of course, but you can potentially end up losing access to your money in the short term or even losing some permanently in the long run. The responsible parties may also choose to flee with the funds they have on hand rather than face the music if they know insider trading charges are coming.
- Pre-IPO Investments
Up until recently, SEC regulations basically made it so that you had to be relatively wealthy to invest in a private company. As of 2016, it became possible for people with more ordinary budgets to get in on this sort of investment, but only through “equity crowdfunding” platforms that have to register with the SEC and meet their criteria.
Long story short — if you’re being offered a piece of a private company before it goes public and it’s not part of a crowdfunding effort at one of the roughly 20 or so registered Reg CF platforms, it’s a scam.
- “Pump And Dump”
In this scheme, the fraud perpetrators will buy up a bunch of inexpensive stock, and then spread false information through various means that causes members of the general public to invest heavily in it. While the stock is at peak value (before the falsehood is detected), the fraudsters sell all their shares for a profit. The innocent people who bought stock based on their false information are left holding their loss. This is a serious federal crime.
These are hardly all of the forms of investment fraud, but some of the most commonly seen. If you’ve been hit by an investment fraud scheme, the good news is that it is often possible to recover money. Aiman-Smith & Marcy is an experienced Bay Area law firm with long experience in “clawback cases” of this nature. Contact us for a free, no-obligation review of your circumstances; we don’t charge fees unless we recover money for you.