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Promising high returns can lead to securities fraud allegations

On Behalf of | Dec 7, 2023 | Professional Liability

Convincing people to invest can be a major challenge for financial professionals. When someone runs an investment fund, for example, they will typically need a constant influx of new capital to maximize the returns that they can offer their clients.

Those who have a track record of success can then capitalize on their prior achievements to attract new investors. Individuals, businesses and investment groups are more likely to partner with investment professionals and firms with a history of providing solid or above-average returns on investments.

Yet, those trying to pitch to new clients need to be very careful to avoid misrepresenting investment practices or promising more than they can provide. Promising unreasonably high investment returns can trigger accusations of securities fraud.

Promising more than one can provide is a risk

Over-promising and under-delivering can lead to criminal charges for financial professionals. Ponzi schemes are a perfect example. Historically, there have been several massive cases of securities fraud that grew in scope because of the promise of sizable financial returns.

Investors were so eager to maximize the profits derived from investing that they may have failed to do their due diligence. A Ponzi scheme is one form of securities fraud that begins with a promise of high returns on investments. People trust in a professional’s track record when they claim to have yielded massive returns for prior or existing clients. Those returns come from paying clients with the capital secured from new investors instead of actual investment returns. Regardless of how many new clients someone brings into a Ponzi scheme, inevitably they will owe returns to more people than they can pay and the scheme will fall apart.

Even if someone does invest as promised, they may not be able to meet the expectations of clients demanding high returns and could end up accused of misrepresenting what they can offer investors. Making concrete statements indicating a specific rate of return on investments, particularly if someone promises to return profits well beyond those reported by most investment firms at any given moment, could open someone up to allegations of securities fraud because of that financial misrepresentation.

Everything from statements made during meetings with investors to marketing materials could contribute to the allegations against an investment professional unable to meet the expectations of those utilizing their services. Someone investigated for securities fraud due to a high-return investment scheme could face criminal prosecution that could effectively end their career.

As a result, mounting a thorough defense to allegations of financial misconduct can help professionals preserve their careers and reduce the likelihood of a criminal conviction.