Feb. 6, 20205 min read

What is Stock Fraud ? {Infographic}

Written by stockstotrade

What is Stock Fraud ?

Is a deceptive practice in the stock or commodities markets that encourages investors to buy or sell based on false information, frequently resulting in losses and in violation of securities laws which are in place to protect investors and markets.

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What is Stock Fraud ? {Infographic}

Securities fraud include: 

  • outright theft from investors (embezzlement by stockbrokers)
  • stock manipulation
  • misstatements on a public company’s financial reports
  • lying to corporate auditors
  • insider trading
  • front running
  • other illegal acts on the trading floor of a stock or commodity exchange.

The fraudster can be an individual, such as a stockbroker, or an organization, such as a brokerage firm, corporation, or investment bank.

Types of Stock Frauds:

  1. Corporate fraud:

Dummy corporations may be created by fraudsters to create the illusion of being an existing corporation with a similar name. Fraudsters then sell securities in the dummy corporation by misleading the investor into thinking that they are buying shares in the real corporation.

  1. Pump and Dump:

The Pump:

False and/or fraudulent information is spread in chat rooms, forums, internet boards and emails. The purpose to increase the price of thinly traded stocks or stocks of shell companies dramatically.

The Dump:

When the price reaches a certain level, criminals immediately sell off their holdings of those stocks pocketing substantial profits.  Any buyers of the stock who are unaware of the fraud become victims once the price falls.

  1. Insider Trading:

There are two types of insider trading.

The first is the trading of a corporation’s stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than ten percent of the firm’s shares. This is generally legal, but there are certain reporting requirements.

The other type of insider trading is the purchase or sale of a security based on the material non-public information. This type of trading is illegal in most instances.

  1. Boiler rooms

They are stock brokerages that put undue pressure on clients to trade using telesales.

Securities sold in boiler rooms include commodities and private placements as well as microcap stocks, non-existent, or distressed stock and stock supplied by an intermediary at an undisclosed markup.

  1. Short and Distort:

Internet investors short sell a stock (which is rented or borrowed) and then spread negative rumors about the company in an attempt to drive down stock prices. Naked Short Selling is where stocks are sold without being borrowed and without any intent to borrow.

  1. Ponzi Scheme:

A type of pyramid scheme, this is where money from new investors is used to provide a return to previous investors. The scheme collapses when money owed to previous investors is greater than the money that can be raised from new ones.

  1. Prime Bank:

Prime bank programs often claim investors’ funds will be used to purchase and trade “prime bank” financial instruments for huge gains. Unfortunately these “prime bank” instruments often never exist and people lose all of their money.

  1. Accounting Fraud:

Management intentionally manipulates accounting policies or accounting estimates to improve financial statements. It also involves misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities.

Tell-Tale Signs of a Fraud:

If it sounds too good to be true, it is. Any investment opportunity that claims you’ll get substantially more could be highly risky. And that means you might lose money.

“Guaranteed returns” aren’t. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” Don’t believe it.

Beauty isn’t everything. Don’t be fooled by a pretty website – they are remarkably easy to create.

Pressure to send money RIGHT NOW. Scam artists often tell their victims that this is a once-in-a-lifetime offer, and it will be gone tomorrow.

How to avoid being scammed:

  1. Take the time to do their own independent research.
  2. Fully understand the company’s business and its products or services before investing.
  3. Spend some time researching the salesperson touting the investment before you invest.
  4. Use the SEC’s resources to review the financial statement of companies and disciplinary history of brokers and advisers.

New to trading and don’t know where to begin? We’ve got you covered- here are the basics.