Securities Fraud

Securities fraud occurs when a person or entity intentionally provides false information or omits material information that induces an investor to make investment purchase or sales decisions. Unfortunately, elderly investors are often the target of fraud.

Elderly investors are vulnerable to fraudulent schemes that result in investment losses. In the absence of a trusted relative, advisor, or contact person overseeing the elderly investor’s financial affairs and portfolio, fraudsters target elderly investors through unsuitable investment recommendations, fraudulent communications, and high-pressure sales tactics. Too often, we have witnessed advisors swoop in to take advantage of the elderly investor’s lack of knowledge about investments and lack of familiarity with investment products.

Diminished capacity – whether the impairment is physical or mental, or both – is at the root of elderly investors being either defrauded or financially exploited. The investor’s inability to protect their own interests has proven time and time again, too tempting to unscrupulous brokers.

It is beyond question that most elderly investors need safe and conservative investments in retirement to preserve and protect hard-earned savings. The funds are, simply put, irreplaceable. Unlike investors in the middle of their working life, an elderly investor cannot go back to the workforce to generate income and replenish their nest egg. A financial advisor may pray on the elderly investor’s need for income to cover living or medical expenses. They may offer investments that guarantee a high income and lie about the risk level to the investor, or in the more grievous cases, offer investments that simply do not exist. FINRA has made the protection of older investors and fraud prevention a key priority. A case involving an elderly investor who has been defrauded or financially exploited, combined with factors such as the investor’s age, health conditions, and financial situation, is likely to be compelling factors for any arbitration panel.

There may also be a claim against the brokerage firm for a failure to supervise or for having a lack of proper supervisory procedures and controls. For example, under FINRA Rule 4512, the broker-dealer FINRA member may have neglected to obtain the contact information of a trusted contact person of the elderly retiree. Likewise, under FINRA Rule 2165, a broker-dealer may also place a hold on either funds or securities in the account of an investor over 65 years old upon reasonable belief that the investor is being financially exploited. The brokerage firm may have neglected these duties.

Sudden changes in the value or composition of an investment portfolio without the elderly investor’s knowledge or approval may be a warning sign. It is crucial that elderly investors deal with reputable brokerage firms and financial advisors.

Defrauded retirees should seek out the experienced securities arbitration lawyers at Iorio Altamirano LLP to immediately evaluate their options.

Non-lawyers use the word “fraud” to describe a number of activities involving wrongdoing. In its simplest terms, fraud is the use of manipulative, deceptive, or other fraudulent devices for financial gain. It is a form of deceit that may include a lie or misrepresentation of a “material fact” or the omission of a “material fact” to mislead a person. When it comes to securities fraud, investors need to understand the instances that may give rise to fraud within the context of transactions involving securities.

The terms securities fraud, investment fraud, or stock fraud are often used interchangeably, but they refer to the same types of violations. FINRA Rule 2020 codifies this fundamental conduct.

Securities fraud occurs when a broker-dealer induces an investor to purchase or sell a security through the use of manipulative or deceptive practices. The inducement is not necessarily limited to purchases and sales only but may also include fraudulent inducements to not sell or “hold” an investment. Regardless of an investor’s knowledge about investments, securities fraud can be hard to detect. As such, investors need to become familiar with some of the most common forms of securities fraud.

• Pump and Dump Schemes – they generally involve false or misleading statements about a company with the goal of boosting that company’s stock price. The hype allows fraudsters to pump up the price of the stock to then profit through the sale of their own shares.  Meanwhile, the unsuspecting investor is left holding the stock as the price drops.
• Pyramid Schemes – the basic foundation of a pyramid scheme is recruiting new members, which keeps the scheme going. The recruitment pitch often involves an investment (that does not exist) that claims to offer substantial returns. The promise of a high return in a short period is a hallmark sign of a pyramid scheme. Fraudsters often target the elderly, people of color, and religious groups.
• Ponzi Scheme – Bernie Madoff’s name is an immediate trigger in our psyches for the term Ponzi Scheme. The scheme is rather simple. A fraudster will pay existing investors with funds from new investors he has brought on to share in the substantial returns they offer. The scheme can only survive for as long as the fraudster enjoys the trust of his investors.
• Microcap Fraud – Microcap stocks are low-priced stocks issued by small companies that are not listed on a major exchange like the New York Stock Exchange (NYSE) or Nasdaq. Microcap stocks include securities known as “penny stocks” or “pink sheets.” The lack of regulation surrounding these securities makes them the perfect vehicle for fraudsters to promote, spread false information, and otherwise manipulate its pricing. The rise of cryptocurrencies and Initial Coin Offerings (ICOs) has created new opportunities for fraudsters to target investors.
• High Yield Investment Programs – Investors often fall into the fraudsters’ trap through promises or guarantees of high yield with almost no risk to the investor. An investment that promises the investor 10%, 20%, 30%, 50%, or even more in returns, with little to no risk, is a hallmark of securities fraud.
• Pre-IPO Investment Scams – An IPO is an “Initial Public Offering.” Investing pre-IPO means investing in a private company before its shares are publicly available. Buying Pre-IPO shares can be extremely profitable if a company ends up going public (Uber, Facebook, Twitter, Snapchat); however, pre-IPO shares are not available to everyone. Due to the risks involved, the Securities and Exchange Commission (SEC) closely regulates and has placed restrictions on who can invest pre-IPO.

Investors who have been victims of securities fraud may recognize the above scenarios connected with their dealings with their financial advisors and brokerage firms. Securities fraud can also arise from other deceptive practices, which may be harder to detect. The following should be red flags to any investor and indicate that they may have been the victim of securities fraud:

• An investment sounds too good to be true (i.e., high returns for low risk);
• An investor is promised “guaranteed” returns, gains, or income, but the investment fails to deliver; and
• An investor is subjected to high-pressure sales practices or “boiler-room” tactics.

Fraudsters commonly use statements such as “everyone is investing in this, so you should too” or “this is a once in a lifetime opportunity that will be gone tomorrow.” Investors should know that every investment carries some degree of risk and that generally, the higher the returns, the higher the risk. However, sometimes, investment losses occur not because the market or company they invested in performed poorly but because financial advisors or broker-dealers committed fraud.

If you believe you have been the victim of securities fraud or any other financial misconduct, contact the experienced securities arbitration lawyers at Iorio Altamirano LLP for a free case evaluation.