The Wolf of Wall Street introduced us to the allure of securities trading and the money to be made. But, what happened was not strictly legal, it was securities fraud, and this is what you need to know about the white-collar crime:
- The Wolf of Wall Street took dramatic liberties, and this is what securities fraud is all about;
- There’s more than one securities fraud scheme, and these are the ten most common; And
- Reasonable defenses to a Securities and Exchange Commission fraud investigation, how to protect your rights and reputation
Hollywood Dramatized Securities Fraud Crime, Here’s The Real Deal Inside Scoop on White Collar Crimes
True crime stories are riveting and dripping with drama, but when Hollywood gets ahold of the story, they can become a tall tale. Although much of the portrayal in the movie The Wolf of Wall Street is true, some creative liberties were taken to spice it up.
Jordan Belfort and his associate pleaded guilty to what is known as a “pump-and-dump” securities fraud scheme (more on what that is later) that cost investors over $200 million. The amount of money they cheated people out of alone is drama enough. So we’re naturally drawn to the get rich quick story.
Securities fraud or white-collar crime does not involve physical harm but financial and emotional turmoil. These schemes can wipe out the entire life savings of some people affected.
In general, a securities fraud scheme works by somebody making false statements about a company or its stock value, and then others use that incorrect information to make financial decisions. It’s like telling someone that the $20 bill in your pocket is worth $200, and they believe it and purchase said bill for the false value.
What Belfort did is just the tip of the iceberg when it comes to securities fraud. These schemes all have something in common, manipulating the financial markets and deceiving investors. Sometimes, these illegal activities threaten the stability of our commodities and security markets.
Because of these far-reaching effects, securities fraud is a federal crime investigated by the Securities and Exchange Commission, the SEC. So, charges and media attention are as big as a blockbuster movie. And, yes, Maryland and other states have charges for these white-collar crimes, called “Blue Sky Laws.” But, the Feds usually try the accused first.
Again, The Wolf of Wall Street showed just one securities fraud. There are lots more.
10 Securities Fraud Schemes the SEC Regularly Investigates
Money has a powerful allure. It can solve many of life’s problems and struggles. Unfortunately, money can also lead people to do shady things to obtain it. Like the phrase says, “Money is the root of all evil.”
Now, securities fraud is devious, but we wouldn’t say evil. People have come up with creative strategies to work with investors and the stock market to their advantage. Some of those plans are considered illegal and immoral, while others are not. We’re focused on the ploys that Maryland and the federal government frown upon.
The schemes come in all shapes and sizes; these are the most common securities fraud the SEC investigates:
- Broker misrepresentation/omission of facts – Any investment opportunity provided by a broker or investment advisor must include ALL necessary points to make an educated investment decision. Omitting facts is securities fraud.
- Micro-cap/Penny Stock fraud – The dream of owning the next Google on the ground floor and riding it to the top keeps this longtime fraud going. The scam relies on two elements, minimal information and low liquidity. First, the micro-cap stocks fall below SEC reporting thresholds, so lack of disclosure and regulatory oversight invites fraud. Second, the “penny” price for the stocks makes them easily manipulated. An example of penny stock fraud is a pump-and-dump scheme; when a person acquires a large amount of a company’s stock, uses fake information to falsely “pump up” the price, and then “dump” the stock for a profit while causing the stock to tank.
- Corporate fraud – This fraud involves misrepresentations by the company’s executive officers and directors. It usually happens when these officers falsify accounts or market information about the company. One of the most famous cases of corporate fraud occurred in the 90s. Enron defrauded its investors through fudged accounting by not reporting its expenses to inflate the profit margin.
- Insider trading – Trading using nonpublic information is securities fraud. Insider trading typically occurs before a significant increase or decrease of a company’s stock value. Someone obtains confidential company information that is not yet public and will affect the stock price. Then, they buy or sell the stock based on that information to make a profit. The queen of domestic living, Martha Stewart, famously served time for insider trading.
- Advance fee schemes – The scheme comprises someone soliciting people to invest in an opportunity, but to do so, they must “advance” an amount of money to cover fees or taxes. The problem is there is no investment opportunity, and the person absconds with the money and never delivers on the investment promise.
- Foreign currency fraud – A trading scheme that defrauds investors by promising high-profit with little to no risk trading in the foreign exchange market. Also known as Forex fraud. Usually, investors are promised to reap thousands of dollars in profit in a small amount of time for a low investment price.
- Ponzi/Pyramid schemes – Named after Charles Ponzi, a notorious swindler from the 1920s, this scheme takes new investors’ money to pay previous investors the high rate of return promised. The reality is that the investors are the only source of money. To keep the scheme going, the con needs to build a “pyramid” of investors to collect and pay, making it seem like the investments are “paying off.” Despite his namesake being the moniker, the most famous and grandest Ponzi scheme in history was pulled off by Bernie Madoff.
- Internet fraud – Technology has always had a role in the scam. It provides new tools for people to use to con others. The Internet allows investment fraud to be more efficient and effective than ever before. Fraudsters quickly produce fake websites, newsletters, or blogs to appear as legitimate investment firms, duping unsuspecting financiers.
- High yield investment fraud – A fraud characterized by the promise of high rates of return with little risk investing in securities, commodities, real estate, or precious metals. High-yield investment fraud always sounds too good to be true.
- Stock manipulation – An example of stock manipulation fraud is a pump-and-dump scheme; when a person acquires a large amount of a company’s stock, uses fake information to falsely “pump up” the price, and then “dump” the stock for a profit while causing the stock to tank. This is how the Wolf of Wall Street, Jordan Belfort, committed fraud.
When it comes to investing, there are many ways someone can be conned out of their money, but was the con a con?
How to Defend Yourself Against Securities Fraud Accusations
Investing is a tricky business. Sometimes money is made, others it is lost. There is risk involved when buying, selling, and trading stocks, commodities, and more. Allegations of unsavory investment tactics will bring the SEC knocking on the door to investigate if any impropriety occurred.
Prosecutors are constantly tasked with the burden of proof in criminal cases. For example, prosecutors must prove beyond a reasonable doubt that the accused intentionally misled or omitted information in a securities fraud case because of the false information investors suffered a financial loss.
So, if it can be proved that the information received by investors was not the cause of the loss, then the case against them falls apart. Your first reasonable defense is to hire a great securities fraud lawyer. Having someone who knows how these SEC investigations go and what to expect can help navigate the long road ahead.
Investigations into securities fraud often take months or years of evidentiary gathering before a case is brought to trial, so the earlier you hire a lawyer, the better. A lawyer protects, guides, and fights for you. In addition, prosecutors often tack on additional charges like bank fraud, wire and mail fraud, computer fraud, tax fraud, RICO, obstruction of justice, and money laundering. An experienced lawyer knows this and is prepared for everything coming your way with a securities fraud investigation.
Besides hiring a lawyer to defend you, here are a few arguments one may use against securities fraud allegations:
- No Knowledge – The federal statutes say no one can be imprisoned or punished for securities violation if they did not know the rule or regulation. In other words, how can you commit a crime if you didn’t know what you were doing was a crime.
- Good Faith – This defense relies on the accused themselves believing the false investment information is accurate. In “good faith,” they passed along the knowledge to others to invest but were unaware the information was incorrect.
- Unlawful Search and Seizure – Law enforcement overstep their boundaries and authority when collecting evidence. The accused are coerced into statements, and warrantless searches or are arrested without probable cause. All violations of our constitutional rights and, if proven, can lead to evidence being suppressed and even cases being dismissed.
- Assisting the prosecution – Although not a defense as it requires guilt in the crime, it is common to mitigate the severe punishment associated with securities fraud. For example, by assisting the prosecution in identifying, arresting, or convicting any other person engaged in the scheme, the accused can have sentences reduced or suspended.
Money’s attraction can undoubtedly affect someone’s rational thinking. The possibility of becoming rich beyond the wildest imagination makes investing glamorous. However, there is an element of gambling when it comes to the stock market. You can win big if you place the right bet but place the wrong one, and poof, the money is up in smoke.
When we strike it rich or find a solid investment, we tend to share the information or strategy that led to the riches. However, just because one person made money does not guarantee someone else will be based on their advice or information.
The big guns, as they say, come out when securities fraud allegations are made, and when the SEC gets involved, it’s time to take every precaution to protect you and your family’s well-being. Contact JC Law today to see how our team can help with your securities fraud case. A free initial consultation is a start to clarity about your specific situation.