Examples of Securities Fraud

Securities Fraud

The most common securities fraud are discussed here under. We invite you to go through the detailing carefully. Be careful to note down the salient features of each type so that you may be able to sidestep getting duped yourself. Educating yourself about securities fraud is the best way to insure yourself against loss incurrence in the future. 

Penny stocks 

Penny stocks or the micro-cap stock market has been observed in society in association with fraud for a pretty long time. Still, it keeps drawing investors right in. even the unbelieving start feeling greedy at the potential prospects of owning a part of Yahoo, eBay, or Microsoft at the very beginning. Buying more shares at relatively cheap rates also strikes the fancy of those drawing an easy ride to riches. With a thousand pounds, you can buy a hundred thousand penny stock shares. 

Greenhorn investors frequently tend to go for very cheap penny stocks of doubtful value rather than invest in a handful of stocks at a good price. Perhaps they believe a single penny change in the penny stock can turn their fortunes around. 

Sadly, there are two basic problems with penny stocks that get them ready for securities fraud. 

Minimal information 

Several micro-cap stocks plunge below minimum asset and shareholder requirements. Absence of information disclosure and regulatory supervision biomes fraud because discovery risk is lower. Furthermore, there is rarely any legit analyst courage or press security with respect to the majority of these stocks. This further lessens info flow and lowers discovery risk for scammers. Penny stocks present low discovery risk. Hence scammers find it convenient to turn to the market. 

Low liquidity 

The other problem with penny stocks is low prices, minimal stock float, small daily volume, making them the flourishing grounds for promoters wishing to control stock and artificially manipulate prices. Elsewhere in this text, you will come across ‘pump and dump, a related securities fraud type. Furthermore, low liquidity can make selling a large position sans the negative impact of price challenging when it is time to exit. 

Penny stocks securities fraud are ‘pump and dump’, and ‘bogus offerings’. 

Pump and dump 

This fraud type occurs when someone takes control of a large amount of a company’s stock, then proceeds to pump up the price. They then give distracting, false info in spam email, press releases, discussion group postings, and sundry unverifiable sources. The explosion of promotional activity for the time being appreciated demand for the stock, leading to price rise, which makes for extra demand from momentum buyers, spurring further rice increase. Upon price momentum being set up, the scammer sells his shares, walking away from the promotion and letting the stock plummet. 

Bogus offerings 

The fraud is sold as an unverifiable breakthrough tech or an upcoming major contract announcement for an obscure company. Frequently, the company will be without operation, earnings or audited financial statements and might be just a shell. 

Penny stocks require a certain type of investor. So unless you give them a specialised treatment, penny stocks are best avoided. 

Prime banks 

Prime bank fraud is conceived with the aim of attracting the eccentric investor who believes all privileged families have secret access to lucrative investments. This customer is offered access to the most prized portfolio at elite banks. However, prime banks or their securities have no basis in reality. 

Among unrealistic fraudulent instruments offering something equally shady are ‘revolving credit guarantees’, ‘standby letters of credit’, and other made up high yielding debt. 

Debt issued via non-verifiable sources has to be invariably avoided. 

Institutionalised securities fraud 

Bull markets frequently come with a permissiveness that begins to pervade the marketplace, making it legit to practice dishonest investment practices. Unfortunately, the lapse in integrity can lead to quite a few examples of securities fraud. 

Accounting fraud

WorldCom, Enron, and other big names cheated millions of investors via creative accounting and insufficient disclosure during the late 90s. Unfortunately, during extraordinary bull markets, regulators and auditors are way less effective at stemming the tide of corruption. 

Unethical Mutual fund practices 

Front running and late trading are privileges granted by mutual funds during the late 90s to major institutions and insiders. As a result, the fiduciary responsibility to shareholders is stowed away, while these investors enjoy an unfair advantage. The total quantum of loss sustained in this manner with respect to Main Street will remain unknown. 

Analyst Research conflicts

Securities fraud can be seen as a staple of brokers’ behaviour as they mix investment banking with in-house analyst recommendations. So when you refuse to trust a doctor if sales commission kickbacks influence his advice, why would you repeat the same mistake with investment advice?

For instance, brokers run into a conflict of interest charges in a similar fashion. Without admitting to any wrongdoing, Merrill Lynch settled with the New York Attorney General’s Office for a cool hundred million dollars. 

Promiscuous business culture and easy money character of bull markets causes institutionalised securities fraud. 

Unlicensed sales agents 

Investment scammers employ the attraction of high commissions to enlist independent insurance agents, investment seminar speakers, financial advisors, and accountants as securities fraud sales representatives. 

Independent agents are just right as a sales outlet as they have long since the custody of your trust. They are, however, wanting in complex compliance departments an illegitimate investment due diligence procedure. 

The charming outcome is a trusted specialist with little more knowledge than you of sifting fraud from legit investments. 

Be on guard if your agent presents you with high returns prospects with next to no risk on viatical contracts, equipment leases, brokered CDs, promissory notes, factoring, or other our of the way investments. 

Affinity groups 

Affinity group fraud involves exploiting the victim’s age, ethnic, religious, professional or sexual identity to secure your confidence, knowing you would like to trust folk who are in the same boat as you.    

Affinity fraud thus manages to bypass our distrust of the stranger. A leading group member is enlisted in selling the investment concept to members of the same group. Interestingly, the recruit, in this case, is no investment expert. 

The leading group member quite naively promotes the investment concept to the group. The whole group pitches in, since they trust their ‘leader’. 

Examples of congregations and their leader and the elderly spring to mind. While congregation members may believe their Church or their charity will be benefitted. The most influential in a group of elderly folk is trusted too. 


Always check broker statements for fees that might have been foisted upon you, trades you did not authorise, or suchlike irregularities. Moreover, your broker might have recommended investments wholly incompatible with your stated trading goals. 

Promissory notes 

Promissory note fraud involves short term debt obligations issued by bogus firms. Generally, independent insurance agents sell them, offering ‘guaranteed’ market returns. 

Remember to steer clear of all investment offerings above-market interest rates. 

Advance fees 

The scammer wants to start the advance money you pay to fund another objective. For instance, you could be instructed to pay upfront for a bargain shipment of oil, coal, or some such commodity that never comes. 

Obversely, you pay an application fee in advance so as to be offered an interest-free loan from an offshore bank. 

Inappropriate investments 

When sold without sufficient disclosure, some investments turn into securities fraud. Variable annuities constitute the commonest example in this category. Their steep commissions, high surrender charges, and costly structures make them unsuitable for a broad range of investors. 

Likewise, callable CDs are higher-yielding, long term certificates of deposits that are issuing bank redeemable. 

These investments carry high withdrawal fees in case you need liquidity. 

Viatical settlements

Viatical settlements were instituted to assist seriously sick folk pay medical bills. This could be realised by selling the death benefit from their life insurance policy .Misrepresented viatical settlements do become securities fraud.  

For instance, the seller’s health could be falsified, even when should the health improve over time, the return on the investment will have been impaired. Conversely, fraudulent applications could make the investment invalid. There could be greatly diminished benefits, rendering the insurance practically worthless. Specialised due diligence skills are needed to manage viatical settlements. 

Offshore investing 

You could be lured into offshore investing. However, you need to be aware that completely different laws obtain on the other side. Investors barely know the law of their land. To expect them to know foreign laws would be ludicrous. 

Bogus Business offerings 

This fraud is sold as an exciting, minimum risk, easy money investment chance. But, unfortunately, hereunder we touch upon businesses that pique the investor’s interest for the wrong reasons : 

  • Oil & Gas 
    Learn to steer clear of working interests in proven gas and oil wells. Frauds encompass ersatz drilling equipment on useless land or truly empty wells. 
  • Equipment leasing 
    Keep your eyes peeled for the time a company sells you a piece of equipment that it agrees to, for a fee, lease back. Their contract business structures are not false. Consumer technologies are leading candidates for this sort of securities fraud.  


We came across some points during our discussion. First, for straightforward, transparent deals, go with a regulated broker. The offshore counterparts will be anything but. The quantum of risk is lower when regulation is higher. But fraud flourishes regardless of the degree of regulation. You cannot let your guard down. When you let greed get the better of you, the guard goes down. Learn to take everything from a conman’s mouth with a pinch of salt. Scepticism should form your first assessment of investment advice. Thorough due diligence should be the conclusive process by which you can identify less apparent cases of securities fraud.   

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