Various unlawful actions fall under securities fraud—from providing false information to buyers in the stock market to manipulation of national financial markets.
Almost anyone can be the victim of securities fraud. Understanding the different types of this type of investment scam can help investors avoid these fraudulent offers.
High-Yield Investment Fraud
Many investment scams start by contacting people through telephone or email. People can also be contacted by mail or by visiting their home. Swindlers can also be found on social media platforms by impersonating brokers, investment advisers, and other sources of market information.
High-yield investment fraud, or HYIF, involves fraudulent promissory notes or unregistered securities that promise high returns with little risk. The profits from these schemes are not legitimately derived from investing in the program; instead, they come from new investors who contribute funds to pay off existing investors and the fraudsters themselves.
These investments are often advertised through news stories, newsletters, and social media. In addition, they may be promoted through seminars and webinars. Fraudsters can artificially inflate the price of financial instruments using false statements and data. Once the value of the stock reaches a predetermined level, the fraudsters “dump” their stocks by selling them at an inflated price, leaving investors with worthless shares.
Investors can protect themselves by staying vigilant to red flags, including offers of promissory notes or unregistered stocks that offer high returns, investment advisors who require hefty upfront fees, or companies claiming exclusive access to lucrative resources such as oil and water. Additionally, it is crucial to research a company and its representatives before investing.
Securities fraud involves a wide range of illegal activities involving deception and manipulation of financial markets. As such, it’s crucial to understand the different types of securities fraud that can impact investors and individuals alike. This way, you can be better equipped to recognize and combat these criminal activities.
High-yield investment frauds are characterized by promises of “too good to be true” rates of return with little or no risk. These scams often involve a pyramid or Ponzi scheme structure in which money collected from new victims is used to pay the high rates of return promised to earlier investors. It gives the false impression that a legitimate, profit-making enterprise is behind the scam.
Another common type of securities fraud is advance fee schemes, in which fraudsters convince investors to send them upfront processing fees for a lucrative investment opportunity but never deliver on the returns they promise. These scams leave investors with significant losses.
Investors who suspect they are the victims of fraudulent activity should consult with experienced securities fraud attorneys to help recover investment losses. These attorneys can assist with identifying red flags, researching investments and advisors, and advocating for victims against wrongful parties.
A shell company, a dummy corporation, can serve a valuable purpose for some businesses. It allows for quick establishment and can act as a front for other companies legally and legitimately. These entities enable their founders to conceal ownership or avoid taxes.
There are legitimate reasons to set up a shell company, such as hiding business ownership from law enforcement or the public. However, some criminals conceal their identities or conduct fraudulent transactions using these corporations. Sometimes, a court might declare the entity a dummy under the most egregious circumstances and expose its principal to liability.
People may also set up shell companies to hide their assets in a divorce, avoid having them seized by the government during litigation, or conceal an unpopular client from other businesses. However, deliberately hiding holdings in this way is considered fraud and illegal.
The law governing dummy corporations is complex. For example, the Supreme Court of Texas has ruled that when a dummy corporation signs a contract, the actual purchaser must be named in the contract. The dummy company must also be a party to the contract, and it must be able to enforce the contract’s terms. If these requirements are met, a warrant signed by a dummy company can still be enforceable. However, the courts have held that dummy companies cannot be used to manipulate contracts by hiding behind a veil of pretenses.
In a pump-and-dump scheme, fraudsters artificially inflate a stock price through false and misleading information. Once the price peaks, the fraudsters dump their shares and profit from their illegal actions. While the people behind these schemes may be company insiders, they can also be opportunistic investors simply looking for a quick profit. Financial advisors and brokers can only fall prey to these schemes if they conduct proper due diligence before recommending an investment.
Microcap stocks, with a market capitalization below $300 million, are often targeted in pump-and-dump schemes that trade over the counter. These securities are not required to adhere to strict reporting standards, making them attractive targets for fraudsters. The fraudsters will spread false or misleading information about the stock through various channels, including social media, online forums, investment research websites, newsletters, and direct marketing campaigns.
Once the share price peaks, the fraudsters will sell their shares in a massive volume, driving the price down and leaving unsuspecting investors with significant losses. They can also get arrested under the federal wire fraud statute if they use email, Internet chat rooms, or telephones to spread their false information. These schemes are against the law, and a conviction could result in jail time and significant financial penalties. The New York City securities fraud defense lawyers can help you explore your options for defending yourself against these charges.