Also known as investment fraud, stock market fraud refers to various white-collar crimes that involve manipulation of stock market information and misleading investors. Perpetrators of these activities use misleading information that causes unsuspecting investors to lose money.
According to the United States Sentencing Commission, the number of stock market fraud crimes has risen by 13.3% in the last five years.
The Securities Exchange Commission (SEC) is a federal entity tasked with regulating the industry, detecting, and investigating investment fraud. However, perpetrators keep developing sophisticated methods to conceal these crimes, making it difficult for the SEC to nab all fraudulent activities. This is where SEC whistleblowers come in.
An SEC whistleblower reports cases of securities fraud they might have witnessed in return for a reward and protection from retaliation. Here are seven common types of stock market fraud to watch for if you would like to support the SEC.
1. Insider Trading
Insider trading occurs when an individual who possesses non-public market information purchases or sells public stocks. Non-public material information refers to any details that are not yet available to the public but can impact an investor’s trading information.
Company executive leaders and brokers are more likely to trade with insider information because of easy access.
2. Ponzi Schemes
Ponzi schemes got their name from the 1920s Italian con artist and swindler Charles Ponzi. Here, the perpetrator scams investors by promising high returns on their investments. Upon investing, the schemer uses this amount to pay incoming investors and keeps some.
This amounts to misleading because the perpetrator asks for investors’ money with no intention of ever investing.
Some of the signs to watch out for include the use of complex strategies, unlicensed sellers, and promises of massive returns with zero risks.
3. Pump and Dump Schemes
In a pump and dump fraud, the promoter first uses misleading information about a particular company in a bid to hike it’s stock prices. This creates an increased demand where the perpetrator then sells their stocks at a high price.
Investors lose their money when the price typically drops because trading decisions were based on false statements. The internet is one of the places to watch out for pump and dump schemes.
4. Advanced Fee Investment Fraud
In an advanced fee fraud, the scammer advertises a lucrative investment opportunity but there’s always a catch; the investor has to pay an up-front fee to secure a higher amount.
The perpetrator does not invest the money and investors lose their advance fees. Signs to watch out for include unlicensed brokers and language like “incidental fee” and “commission.”
5. Late-Day Trading
Late traders buy, sell, or redeem mutual fund shares after the next day’s price has been calculated, but record the trading as having occurred before the close of the market.
Late-day trading is illegal because it puts the investor in an advantageous position of trading with a higher price than other traders.
6. Affinity Fraud
Affinity fraud targets members of a specific group based on things like age, religious groups, and race. The perpetrator aims to gain trust from the group often through their leader.
The fraudster then uses this chance to promote deceptive activities, including Ponzi and Pyramid schemes, where members end up losing money on a large scale.
7. Internet Investment Fraud
The internet has made it easy for investment fraudsters to develop sophisticated methods of defrauding unsuspecting users.
Internet investment fraudsters use things like social media, spam emails, and clone websites to spread misleading information that can have an impact on investment decisions.
Such criminals have also mastered how to hide their tracks, making it difficult to recover lost money.