Here’s What You Need to Know About Fighting Securities Fraud

By | February 24, 2017

As many as 234 securities class actions were filed in federal courts in 2015, the highest since 2008. Moreover, the U.S. Securities and Exchange Commission (SEC) filed about 807 enforcement actions that covered a range of misconduct and obtained orders equal to about $4.2 billion in disgorgement and penalties in 2015, as compared to 755 enforcement actions and orders equal to $4.16 billion in 2014. These statistics show that financial crimes are on the rise, and investors must be careful.

‘Security’ is a broad term used for a number of investments such as corporate stocks, municipal bonds, investment contracts, etc. Securities fraud (also known as investment or stock fraud) is a deceptive practice in the stock or commodities market that provokes investors to make sales or purchase decisions based on fake information, resulting in huge losses.

The most common types of securities fraud include:

  • Unsuitable Recommendation: According to Investopedia, unsuitable recommendation or unsuitability is defined as a “situation where an investment strategy does not meet the objectives and means of an investor. In most parts of the world, financial professionals have a duty to take steps that ensure that an investment is suitable for a client.”
  • Overconcentration: The golden rule of diversification is violated, which means the broker invests money in one type of stock only. This conduct leads to massive monetary losses if the stock plunges.
  • Misrepresentation or Omission: According to Justia, a broker can be held liable for misinterpretation when, “an investment broker, in trying to sell a client on a stock or other security, makes a false statement about some aspect of the transaction.”
  • Failure to Execute: This happens when the broker fails to sell, and recommends you to keep the security or when he/she refuses to sell it even after being requested to do so repeatedly.
  • Churning: Investopedia defines churning as excessive trading by a broker in a client’s account, largely to generate commissions.
  • Selling Away: As per Wikipedia, “Selling away in the U.S. securities brokerage industry is the inappropriate practice of an investment professional (such as a registered representative, stockbroker, or financial adviser) who sells, or solicits the sale of, securities not held or offered by the brokerage firm with which he is associated.”

If you’re a victim of securities fraud or have faced huge losses due to misconduct by your broker/advisor, you must invoke your rights and take advantage of the securities laws in your state to get compensated.

Laws Governing Securities Fraud

The SEC is the primary governmental authority responsible for handling securities fraud, and it has mandated a number of laws that are designed to prevent misconduct. The laws that govern securities fraud are:

  • Securities Act of 1933
  • Securities Exchange Act of 1934
  • Trust Indenture Act of 1939
  • Investment Company Act of 1940
  • Investment Advisers Act of 1940
  • Sarbanes-Oxley Act of 2002
  • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
  • Jumpstart Our Business Startups Act of 2012

Apart from SEC laws, each state has its own laws for securities fraud and securities commission. Security frauds may be punishable under state or federal laws, but they are prosecuted as federal crimes.

Once convicted for securities fraud, the party involved has to pay hefty penalties such as:

  • Fines: Though the amount of fines depends on the type of crime and the circumstances, they may range between $10,000 and $5 million or more.
  • Incarceration: In several cases, conviction for securities fraud may lead to prison time. For federal securities crime, the convict might be sentenced to 5-year federal prison time per offense.
  • Probation: Probation is typically ordered in case of a single instance of fraud or when the fraud did not result in heavy financial losses.
  • Restitution: Restitutions are part of the sentence ordered by the court as securities frauds involve clients, investors, employees, and others who suffer monetary loss. Restitution must be paid along with additional fines.

Knowing When to Hire a Lawyer

It is true that stocks and investments involve a certain level of risks, and it is never possible for brokers and/or advisors to calculate the exact amount of risk. This makes it even more difficult for investors to understand whether their loss was the result of a reasonable risk or a broker fraud/misconduct. However, by taking a look at certain factors, you can differentiate between natural loss and fraud.

You can confirm a securities fraud when:

  • Unauthorized trades appear on your account
  • You face sudden and significant losses
  • You are forced to invest in risky investments
  • You see misconduct on the part of the broker/advisor

If you suspect something is wrong, it probably is. Consult with your lawyer immediately and ask him/her to evaluate the situation and determine whether or not you need to take legal action.  Your lawyer will confront the broker/advisor and tackle the situation carefully. By speaking to your lawyer at the right time, you can save yourself from several securities fraud issues. Depending on the circumstances, the lawyer will recommend either filing a lawsuit or proceeding for FINRA arbitration.

Numerous people have been victims of securities fraud and have lost considerable money. It is, therefore, important to take extra care when investing money. Check the integrity of the broker/advisor, evaluate the risk factors and make sure you take necessary preventative steps immediately if you doubt misconduct. A securities fraud lawyer will be the best person to help you, so get in touch immediately if you have been cheated or swindled.

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