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Investment Fraud

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The Federal Bureau of Investigation defines investment fraud (securities fraud) as crime involving "deceptive practices in the stock and commodity markets." More loosely defined, the term can be used to describe a range of crimes involving stocks or securities. The most common offenses include actions taken by brokerage houses and financial advisors to mislead and entice investors into making investments that run counter to the investors' interests.

Securities fraud is punishable by fines and jail time. In some cases, it also serves as grounds for a civil lawsuit through which parties harmed can seek compensation for their losses. If you believe you have been harmed financially as a result of securities fraud, you may have legal recourse. Contact a securities fraud attorney for more information.

Examples of Securities Fraud

In 2008, a rash of securities fraud cases came to light as a result of the global financial crisis. The largest and most infamous was that of Bernard Madoff, who, when arrested by the FBI, admitted to directing a $50 billion Ponzi scheme over a span of decades.

While undoubtedly the largest, unfortunately Madoff's massive scheme was just the tip of the iceberg. Numerous brokerage houses, financial advisors and others have been implicated in a spate of securities fraud cases and related examples of negligence involving securities. Many of the world's largest banks and financial firms, some of which have since gone under, have been accused of wrongdoing or have been caught up in the scandal, including:

  • Lehman Brothers
  • Washington Mutual
  • Countrywide
  • Charles Schwab
  • Wachovia
  • Bear Stearns
  • Bank of America
  • Citigroup
  • Merrill Lynch
  • American International Group Inc. (AIG)

Security Fraud Cases

Of the many securities-related lawsuits filed over the past year, some have involved fraud while others have not. Specifically, acts that do not involve deception are not considered fraud. However, when one of these acts involves negligent behavior that causes someone harm, it can be grounds for a lawsuit. Stock brokers and other members of the financial industry are bound by laws, regulations and self-regulatory rules as set forth by the National Association of Securities Dealers (NASD) and other organizations.

If you and your securities fraud lawyer can prove that your stock broker or financial advisor committed any of the acts listed below, you may have a case for investment malpractice.

  • Conflict of interest
  • Improper advice
  • Failure to diversify
  • Bad recommendations
  • Undue risk for your investment goals
  • Failure to advise you of risks
  • Failure to avoid or minimize losses

The SEC actively encourages victims of securities fraud and other forms of consumer fraud to file a complaint at their website and speak with a lawyer. In order to successfully pursue a case for securities fraud or negligence, your attorney will need to show that your broker, advisor or other financial representative failed to exercise reasonable care, and that this failure caused you undue financial harm.

Securities Class Action Lawsuits

The chaos surrounding the current financial crisis has managed to engulf some of the nation's largest financial institutions. In addition to losing billions of dollars and teetering on the edge of bankruptcy, nearly one-third of U.S. financial firms were named in a securities class action lawsuit in 2008, including financial giants such as Countrywide, Washington Mutual and American International Group Inc. (AIG).*

Securities class action lawsuits are usually filed in large cases in an effort to reduce legal expenses for all participants and to take advantage of power in numbers. A class action usually begins with a "lead plaintiff" — an individual or institutional investor who has sustained significant financial loss as a result of the fraudulent or negligent actions of someone linked to the securities industry. The lead plaintiff chooses the attorneys and is responsible for the initial legwork associated with the case.

After filing a class action lawsuit, the attorney representing the lead plaintiff and eligible participants (others who have been defrauded) must issue a press release announcing the case. Typically, eligible participants are not required to take any action until the case has been settled. If you have been a victim of an act of securities fraud for which a class action suit has been filed, your only task, in the initial stage, is to follow the case until it settles. The website of Stanford Law School's Securities Class Action Clearinghouse provides information on ongoing class action lawsuits.

Once a securities class action lawsuit has been settled, the plaintiffs' attorney(s) are required to notify participants of the outcome. Eligible investors are required to complete a proof of claim form in order to receive their portion of the settlement.

Types of Securities Class Action Lawsuits

Securities class action lawsuits cover a wide range of acts. Three of the most common are stock and securities fraud, stock broker fraud and lawsuits involving the Employee Retirement Income Security Act (ERISA).

Stock and Securities Fraud class actions occur when the issuer of a stock or security (a public company) makes false statements regarding the company or fails to inform investors of events that may adversely affect the security's value. A well known example is the case of energy giant Enron Corp., whose monumental growth over a period of 15 years was based on a complex scam. Investors harmed by such scams may be eligible to file suit against the company in question, as well as its directors, officers and others involved (auditors, underwriters, stock brokers, etc.).

Stock Broker Fraud class actions may arise from a variety of intentional or negligent actions or phenomena, including unfair transaction fees, misrepresentation of stocks and the recommendation of stocks that are incompatible with an investor's agreed-upon level of risk. Stock broker fraud also includes insider trading, failure to properly diversify a client's portfolio and "churning," whereby a stock broker processes an excessive number of transactions in order to profit from the transaction fees.

ERISA-related class actions are filed as a result of negligent behavior associated with stock options tied to a company's benefits or pension plan. Employees or former employees affected by these acts are often eligible to file a lawsuit against the company's officers for placing their benefits and/or pension funds at unnecessary risk.

The laws and regulations pertaining to securities are incredibly complex and, in certain cases, vary by state. If you believe you have been a victim of securities fraud or an act of negligence associated with your investments, you should strongly consider contacting a securities fraud lawyer.

* Stanford Law School Securities Class Action Clearinghouse

Did You Know?

The Securities and Exchange Commission (SEC) offers several pages of tips in its online Guide to Identifying and Avoiding Securities Fraud.

Blowing the Whistle

The Occupational Health and Safety Administration (OSHA) is tasked with protecting employees of publicly traded companies from retaliation for reporting investment fraud. If you have been threatened, harassed, demoted, suspended, fired or discriminated against for blowing the whistle on your employer, speak with your attorney or contact OSHA's Office of the Whistleblower Protection Program.