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3 types of financial conduct that may constitute securities fraud

On Behalf of | Aug 10, 2023 | Business Law

Financial misconduct has a way of unfairly impacting those who do not engage in questionable decisions or illegal behavior. Attempts at securities fraud, for example, are a way of getting people to invest money with inaccurate information.

Securities fraud might involve a single individual, like a stockbroker, making wild promises to their clients. It could also involve multiple people or entire businesses. Modern securities fraud takes on many different forms, but the three below are among the most broad-reaching and common forms of securities fraud.

Ponzi schemes

Perhaps the best-known form of investment fraud is the notorious Ponzi scheme. Often a single investor will make promises about returns to clients that their financial records seem to support. However, instead of actually making smart investments, what they do is take the money invested from new clients to pay returns to old clients. By the time people uncover Ponzi schemes, the majority of the invested resources may already be long gone.

Insider trading or pump-and-dump schemes

Sometimes, Securities fraud does not involve mismanaging or misappropriating the funds provided by a single investor or entity but rather manipulating the overall market. Insider trading occurs when one party with access to non-public information tries to leverage that knowledge for personal financial gain. They may buy or sell stock because they know about an upcoming bankruptcy filing or merger that will have major economic consequences. Other times, the manipulation involves artificially inflating public sentiment toward an organization or investment, often by generating online chatter. So-called pump-and-dump schemes convince numerous parties to invest in stocks or businesses with minimal value while others sell their investments for a high return.

Pyramid schemes

This devastating form of securities fraud involves entire organizations structured to take advantage of low-level investors and those with entrepreneurial dreams. Pyramid schemes are different from direct marketing and sales in that those that invest in theory make returns on what other people sell as well, meaning that there is an incentive for people not to conduct sales so much as there is to bring in new investors who will sell. Inevitably, those on the bottom tier or late to join the organization will end up investing money with little hope of any return on those investments.

Those taken advantage of in a securities fraud scheme can sometimes take legal action against the individual or business that engaged in fraud. Being able to identify securities fraud when it occurs is often the first step toward pursuing economic justice from those who have engaged in financial misconduct. Seeking legal guidance is usually the second.