What Is Investment Fraud?

Investment fraud is also known as stock fraud or securities fraud. The most common form is a deceptive practice used to get investors to purchase stocks or other securities based on information that is not accurate.  The result is usually the loss of the investor’s capital.

Investment fraud is a broad topic that also covers insider trading, embezzlement by a stock broker who misrepresents the gains in your investments and misstatements made on a public company’s financial documents that lead investors to buy its stock.

This litigation guide outlines this illegal practice and what you can do if you’ve been the victim of investment fraud.

Here’s a look at how large-scale and small-time investment fraud works.

Corporate Fraud

Enron was the largest recent case of corporate investment fraud. The books were altered to show the company was doing very well when, in fact, it was not. Investors poured money into the company in the hopes of realizing huge profits. Executives in the company were voted enormous salaries based in the deceptive numbers they had “cooked.”

Dummy Corporations

Those committing the fraud may attempt to sell you shares in a company that exists in name only. The stock is worthless, and your money is gone.

Pump and Dump Schemes

This type of stock fraud is usually done online. A fraudster buys stock in a little-known company and then goes into investment chat rooms and pumps up the stock. Fraudulent information is often given about the company and its potential. The goal is to get other investors excited enough to buy large quantities of the stock. The increased demand drives up the price at which time the fraudster dumps (sells) the stock at a huge profit.

Ponzi Schemes

In this common type of investment fraud, the person perpetrating the fraud uses money from new investors to pay small dividends to old investors to make them think the stock is doing well. More people invest, and the fraudster pockets most of the money. The Ponzi scheme ran by former NASDAQ chairman Bernie Madoff was used to bilk investors of more than $60 billion dollars.

There are other, more technical types of investment fraud, but these are the most common. If you believe that you’ve been defrauded, contact a litigation attorney with the details of your failed investments. The litigation lawyer will help you recover your lost money and may begin a class action suit to locate other investors who suffered the same type of losses.