What Is Investor Fraud?

C. Mitchell

Broadly speaking, investor fraud is any sort of lie, misstatement, or deception related to investments. The most basic examples of investor fraud involve phony investment brokers selling shares or futures that do not really exist or at least are not worth the price being collected. More complicated examples involve insider trading and corporate collusion, which profits a few select individuals at the expense of all other investors.

In most jurisdictions, investor fraud is punished according to a sliding scale that takes into account the fraudster’s knowledge, sophistication, and total profit.
In most jurisdictions, investor fraud is punished according to a sliding scale that takes into account the fraudster’s knowledge, sophistication, and total profit.

Investments are always risky, and loss is not uncommon. Loss caused by bad choices made alone is quite a bit different than loss caused by another’s deception, however. Most countries have investment fraud laws to protect people from being persuaded or pressured into making not just unwise but in most cases altogether illegitimate investment choices.

Investor fraud comes in many different varieties. In many cases, it centers on the offer of some new investment opportunity — shares in a new company, for instance, or a stake in some new booming technology venture. This kind of fraud often contains an advanced fee scheme, whereby the fraudster insists that the investor must pay first, then the investment interests will transfer. In most cases, nothing transfers, and the fraudster is nowhere to be found.

Letter of credit fraud is another common type of investor fraud. In this scheme, fraudsters attempt to sell bank-issued letters of credit as investment opportunities, often promising high returns on an investment that is not actually an investment at all. Letters of credit are financial documents promising payment between parties in international trade. It may look from the wording like vast sums of money are to be made, but in most cases this simply is not true.

Bank note fraud and so-called Ponzi schemes work similarly, with investors being promised extraordinary returns on capital that are not only unlikely but also nonexistent. Fraudsters promise in both of these schemes that an initial investment will yield higher returns than are normally available. In straight bank note fraud, invested money is channeled off-shore or quickly spent. Ponzi or pyramid schemes often return newly "invested" money to initial investors, which adds an air of legitimacy at first — but later victims usually never see anything.

Investor fraud often also centers on the stock market. Sales of stocks that do not really exist, artificially hyped interest in stocks to create a temporary bubble of value, and promises of investment return that cannot be substantiated all qualify as stock fraud. When a company publishes false information about itself or its projected sales in hopes of increasing stock sales, this is also usually breaking fraud laws.

A company’s internal stock manipulations, while arguably not as egregious as directly defrauding individuals, are often no less illegal in most jurisdictions. Securities fraud includes most aspects of insider trading and stock front-running. Any activity that unduly influences the sale price of stock or hampers any ability of the public to fairly and equally purchase stock is usually considered investor fraud.

In most jurisdictions, investor fraud is punished according to a sliding scale that takes into account the fraudster’s knowledge, sophistication, and total profit. Of course, in order to be prosecuted, fraudsters must first be caught. Many government entities publish informational brochures about recognizing fraud. Reporting fraud is usually as easy as speaking to any law enforcement personnel officer. Some government fraud agencies also have tip lines, many of which are anonymous.

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