What is Stock Fraud & How Do You Report It?

Stock fraud deprives investors of billions of dollars every year. Certain types of fraud, like stock broker fraud, are easy to spot once the investor starts losing money. Often these cases happen because brokers recommend securities with too much risk without adequately informing their clients about that risk. Other types of securities fraud occur at the corporate level and fraudulently inflate the price of stock shares. Investors should be aware of the different types of stock fraud as well as what to do if they suspect fraud on the part of financial advisors or brokers.

Manipulation of a Security’s Price or Volume

Several different types of stock market manipulation artificially increase stock prices. Stock market manipulation is a violation of Section 10(b) of the Securities Exchange of 1934, which prohibits the use of manipulative and deceptive devices in the sale of securities.

Investors might “paint the tape,” a term that describes stockholders selling stocks to each other to create more trading volume. Increased trading activity drives up the price of shares. Painting the tape is pure manipulation as it does not reflect genuine market enthusiasm for these particular shares.

Similarly, when brokers “mark the close,” they purchase securities at a higher price toward the end of the day, influencing stock prices for the following day.

Ponzi Schemes

In a Ponzi scheme, a conman persuades investors to purchase shares, typically with the promise that this investment will earn a very high return. Instead of putting the investor’s money toward a legitimate investment, the conman instead uses the new investment to pay off previous investors, presenting these payments as a profit to the previous investors. Meanwhile, the investor is siphoning off much of the investors’ money for themselves.

Pyramid Schemes

In a pyramid scheme, fraudsters make money by recruiting promoters under the guise of a legitimate business opportunity. The promoters recruit new promoters, building the layers of a pyramid. Each new recruit pays a cut of their income to their “upline” – the person that recruited them. A pyramid scheme’s primary focus is on new recruits, rather than a legitimate product of investment.

High-Yield Investment Programs

Investors should always be suspicious of promises of huge returns. Steer clear of anyone promoting an investment with a return of over 30%. Investors should also know that any investment that comes with a “guaranteed” return should not be trusted.

Insider Trading

Executives, as well as financial advisors and lawyers, may have insider information about upcoming acquisitions – acquisitions that could dramatically affect the price of shares. Insiders are also not allowed to tip off friends and family members.

Recently, the SEC opened an insider trading investigation into Brijesh Goel and Akshay Niranjan, following allegations that they made over $290,000 after Goel allegedly received nonpublic information through his role at Goldman Sachs, information that included upcoming acquisitions. Brijesh Goel allegedly gave this information to his close friend Akshay Niranjan, who then used that information to exercise profitable call options.

Misleading Statements to the SEC

In order for a security to be bought and sold on a public stock exchange, it must first be registered with the SEC. Registration forms that omit information or contain misleading statements may halt the registration process. For example, the SEC recently halted the registration of American CryptoFed after they allegedly made misleading statements to the SEC. They also allegedly omitted required audited financial statements.

Municipal Securities Fraud                                                                                

Municipal bonds are issued by towns or cities and have a low-risk reputation. Corrupt city officials, however, are a risky variable. In June 2022, the SEC charged the city of Sterlington and Mayor Vern Breland with municipal bond fraud. The city allegedly issued $5 million in utility and wastewater bonds following a fraudulent projection of the number of Sterlington sewer customers.

How Do Regulators Prevent Stock Fraud?

The SEC cannot monitor every company and financial advisor, so they incentivize the public to help uncover fraud. In 2021, the SEC awarded $564 million in whistleblower awards to 108 individuals. The Dodd-Frank Wall Street Reform and Consumer Protection Act provides specific protections – the SEC will protect the whistleblower’s confidentiality, and employers are prohibited from retaliating against whistleblowers.

What to Do if You Suspect Stock Fraud

The SEC provides a phone number for reporting securities fraud: (202) 551-4790. You can also report suspected securities fraud or misconduct via the SEC’s online TCR form: SEC.gov | Report Suspected Securities Fraud or Wrongdoing.

Our attorneys can help you recover funds lost due to stock fraud. Contact us for a free case evaluation today: Contact (877) 600 – 0098 or info@kurtalawfirm.com.