Financial markets are difficult to navigate because of their complexity. It is crucial to have the right information at the right time to make intelligent decisions. Unfortunately, some investors have little clue when it comes to trading, which makes them easy to deceive.
It is also necessary for regulators to find the holes in the system and fix them before they get exploited. Fraudulent behaviors can result in massive losses for the victims, whether they are individuals or companies. This makes it critical for whistleblowers to report fraud to the SEC with help from a lawyer.
Learn to spot them when they appear on the horizon. Below are some of the most common types of securities fraud:
The movement of publicly listed stocks affects thousands of people, including buyers, sellers, employees, and customers. This should be allowed to fluctuate naturally because of market forces so that the value reflects the real state of the shares. Everyone should be on equal footing when they put their money on these stocks.
Those who work in the company can trade their shares as long as they provide full disclosure when necessary. The problem arises when these insiders take advantage of their position to make money by making insider trading decisions using information that they stumbled on but that is not generally available to the public.
Criminal syndicates earn large amounts of money, but they can’t use these funds outright as they could be detected by the authorities. They often rely on the process of money laundering to make it appear as though they obtained their funds from legitimate sources.
First, the dirty money is cleaned up through clever placement in the financial system, such as currency exchanges or commodity investments. The source is then concealed through a web of transactions to evade tracking.
Once integrated, they can finally use the money out in the open. Criminals have been doing this for a long time, but now they are using new technologies to avoid detection. These include online banking, virtual currencies, anonymous online payments, mobile peer-to-peer transfers, and proxy servers.
Naked Short Selling
Short selling has become a popular way to make quick profits. With this practice, traders often borrow securities, sell them, and then purchase them back. This is usually in anticipation of a price decline because they will then effectively earn money. They sell high and buy low.
Some people have abused this practice, trying to short-sell assets without even borrowing the security. This makes the whole thing much riskier and can result in many failures to deliver. This tends to drive down stock prices artificially. This may be accompanied by the spread of false information to ensure price fall, in which case it is called short-and-distort.
Assets may be entrusted to some people for safekeeping or for a specific use. Embezzlers do not do as they were told. In fact, they withhold these assets and use them for their own purposes.
For example, account managers might be tempted to embezzle the funds entrusted to them by their investors. Instead of using the funds to purchase assets as directed, they could control these according to their will. This takes a great deal of planning and know how to avoid discovery. Criminals convert the assets in bits and pieces so that their activities don’t raise suspicions. It could take years and meticulous accounting to discover the fraud.
Pyramid schemes can take many forms, with some being cleverly disguised as tempting investment prospects.
However, the underlying structure and result is the same: They require multiple levels of investors, with each needing to add more into the system under them for profits to be generated. The returns can be high, especially for those that joined early, but these will eventually dry out.
It is practically impossible for the recruitment to continue indefinitely given the finite number of people in the world. When there are no more fresh faces at the bottom to support those at the top, the pyramid will collapse under its own weight.
In this scheme, fraudsters target the stocks of small companies. They go on deceptive promotional campaigns to convince other people to invest their money on the latest and greatest company in the market.
The shares are generally low-cost picks, which makes them attractive to buyers. After the heavy promotion in blogs, message boards, press releases, and emails, enough people may be convinced to purchase shares causing an immediate rise in prices. The perpetrators who already bought massive amounts when it was cheap will then sell their shares to cash in—a process known as pump and dump. The prices will then fall, leaving the new investors with large losses.