Articles Posted in Stock Fraud

In July 2020, the Securities and Exchange Commission made a proposal to vastly change the reporting requirements of hedge funds. The Securities and Exchange Commission’s proposal would permit hedge funds with less than $3.5 billion in assets to stop reporting their holdings in quarterly reports to the Securities and Exchange Commission.  At this time, the Securities and Exchange Commission requires quarterly disclosure of stock positions held by hedge funds that have more than $100 million in assets under management.

According to the Financial Times, during the ‘consultation period’ when the Securities and Exchange Commission considers comments made about their proposed changes, 2.262 letters were submitted to the Securities and Exchange Commission regarding the proposed change to the disclosure rules.  Of these 2,262 comment letters, 99% were against the proposed rule, according to Financial Times. The result of such a large number of letters opposing the rule change is that the Securities and Exchange Commission is expected to withdraw its proposal and keep the current disclosure threshold of $100 million.

The $100 million threshold has been in place since 1975 and it requires hedge funds to file a “13-F” report each quarter to disclose their holdings.  The Securities and Exchange Commission looked at the fact that the US equity market capitalization has grown from $1 trillion to an $35 trillion and decided that it was time to raise the disclosure limit.  The Securities and Exchange commission also claimed that the disclosure requirements at $100 million were a burden to the smaller hedge funds. This reasoning leaves out the impact that its actions would have on the transparency of the markets. The Financial Times reports that hedge fund managers were skeptical of the Securities and Exchange Commission’s reasoning.  The smaller hedge fund managers and even the CFA Institute noted that the costs to file the 13F are negligible and the process was mostly automated by today’s portfolio accounting software programs.

The Wall Street Journal published an article by Jason Zweig and Andrea Fuller on August 31, 2020 explaining their analysis of how financial advisers fell short in meeting their obligations to disclose important information to individual investors like you.[1] The Wall Street Journal analyzed the filings made by investment advisers on the SEC Form CRS.  The article and analysis revealed what seems to be disturbing lack of candor by investment advisers.

It is fundamental to full and fair disclosure that if an individual investor wants to know whether their financial adviser, or a financial adviser they want to hire, has any legal or regulatory problems, that this information is easy for an investor to obtain.  To that end, the Securities and Exchange Commission (“SEC”) sought to simplify the process by which an individual investor can access this information.  The result of the SEC’s efforts was the “Form CRS.”  “CRS” stands for customer (or client) relationship summary.

This information has been available.  However, for the average “Main Street” individual investor, the information was not easy to find.  And when the customer complaint and regulatory history was found, the disclosures were difficult to understand.  The Form CRS[2] was intended to address this complexity and difficulty through simplification.  Thus, the SEC created what SEC Chairman Jay Clayton said in November 2018 would be a “clear and concise” document.  I think they succeeded.  Wall Street, however, failed.

In Interactive Brokers, LLC v. Saroop, the United States Federal Court of Appeals for the Fourth Circuit made it clear that a broker’s contract that incorporates FINRA rules supports a breach of contract claim when the broker violates FINRA.  Further, this case reinforces the public policy of using arbitration to lower costs and create an efficient resolution forum for disputes.

Interactive Brokers that Saroop and two others (collectively, the “Investors”) opened accounts with Interactive Brokers where they were required to sign the contracts that provided that all transactions were subject to “rules and policies of relevant market and clearinghouses, and applicable laws and regulations.”  Interactive Brokers hired a third-party to trade the Investors’ accounts (the “Manager”).  Using the Investors’ margin accounts, the Manager invested in short-term futures, with a symbol of VXX.  The Manager sold naked call options for VXX, meaning that the Investors had the right to buy VVX at a set price until the option expired.  This works great if the market price increases but is a serious problem if the value decreases.  To make matters worse, the Manager traded using the Investors’ margin accounts.  A margin account is when you borrow money to purchase stock. This means that you can lose more money than you invested.

The high risk associated with margin trading prompted FINRA to prohibit purchases of VXX using margin.

Stock fraud is awful, but it should not surprise you that it happens.  There are bad people out there who think nothing of stealing money from anyone they can.  Stock fraud, I bet, has been happening since corporations became a thing.

Stock fraud may occur when a company defrauds investors when convincing them to buy shares in their company.  The investment fraud may be a market manipulation scheme.  It may be an unethical brokerage firm forcing their brokers to sell the ‘stock of the day’ knowing full-well the stock is not worth a fraction of what the price the sell to you.

But, perhaps the worst form of stock fraud, to my mind, is the stock fraud that takes advantage of people’s fear about current events.  Understandably, potential investors or victims of fraud are today extremely concerned and frightened about catching Covid-19.  This is especially true for that frequent target of fraudsters, older people.  Not only is this segment of the population more vulnerable to Covid 19, but their fears are likely at a higher level.  This set of circumstances just creates a more fertile ground for investment fraud that takes advantage of loneliness and fear such as we have today with the pandemic.  So, it is vital to get the word out to older people and their children or caretakers to be especially vigilant about investment fraud phone calls.

While the stock market has been booming in recent years, 84% of stocks are held by 10% of the population. Despite this fact, there are millions of Americans that hold on to stocks and are no less susceptible to stock fraud than anyone else. Stock fraud can hit investors of all types, most especially those that aren’t as well versed in the world of trading.

Here are six signs that you might have been a victim of stock fraud that you need to look out for.

1. Brokers Trading Without Your Authorization

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The promise of low risk-investment with a high return is an attractive offer to many.

Sadly, in most cases, these offers are nothing but an investment fraud designed to trick you out of thousands of dollars.

If you have been a victim of an investment fraud and don’t know what help is available to you, this article is for you.

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You trusted your stockbroker with your hard-earned money. And it seemed like a great arrangement…at first.

Now, you’re worried that your stockbroker is committing fraud with your investments.

You’re not alone. In 2017, 66,873 cases of securities fraud and theft were reported to the United States Sentencing Commission.

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When you consider the financial toll of a hurricane or other natural disaster, losses due to investment fraud is most likely not something you would factor in. However investment fraud following a catastrophic natural event is quite prevalent.

Many investors have found themselves in hot water after getting involved in investment opportunities related to hurricanes or other natural disasters. Scammers love using natural disasters to leverage investment fraud, as they are able to prey on vulnerabilities of both those directly affected by the event as well as those who want to help disaster victims.

In the wake of Hurricane Michael, you may receive unsolicited investment offers purporting to provide some type of opportunity for returns. These offerings may be related to disaster relief, clean-up, or even storm prevention. While it’s possible some of these offerings may be legitimate, chances are high that they are either too good to be true or a flat-out scam.

market manipulationYou know that the factors affecting an investment’s valuation go behind standard data and metrics. Often, an investment’s value can hinge largely on highly subjective factors, like public perception. The “reputation” of an asset or security can either signal an attractive investment opportunity or drive away investors.

You’ve probably heard of pump and dump schemes; a form of stock manipulation wherein essential information about an asset may be misrepresented or misreported in order to artificially drive-up its value before the scammer dumps their shares. In these types of schemes, fraudsters create a buy frenzy by promoting a stock as a desirable investment.

Well there’s also an inverse to this type of investment fraud and it’s called a short and distort scam.

We’ve all seen the news stories. Stock market fraudsters get caught running a scheme where people lose millions.

The most recent of these was Bernard Madoff in 2008. He tricked investors out of 50 billion dollars.

Most people have no idea they’ve been tricked until it’s too late. This doesn’t have to be you.

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