Securities & Stockbroker Fraud

Types of Securities and Stockbroker Fraud

Securities fraud encompasses a broad range of behaviors that stockbrokers, firms, corporations, and investment banks can engage in. While all types of securities fraud tend to benefit the perpetrator at the expense of the victim, perpetrators of securities fraud can often be very creative with how they go about defrauding their victims. A California securities fraud lawyer at Evans Law Firm can handle various types of securities fraud, but some of the most common that we see repeatedly include:

  • High yield investment programs: High yield investment programs (also known as HYIPs) are scams that promise extremely high returns at little or no risk to the investor. Some high yield investment programs even offer annual returns of 30% to 40% or more. In these scenarios, if the investment appears “too good to be true,” it probably is.
  • Pump and dump schemes: A pump and dump scheme occurs in two phases. During the first phase, stock promoters boost the price of a stock with false or misleading statements about the company issuing the stock. During the second phase, the promotors profit by selling their own holdings of the stock after the stock price has been pumped up, thus “dumping” them on the market. Once the perpetrators do this, the stock rapidly loses value and other investors lose their money.
  • Advance fee fraud: Perpetrators of advance fee fraud ask investors to pay a fee up front so that a deal can go through before they receive any money, stocks, or warrants. In many cases, the perpetrator then either vanishes or requires a series of additional fees to be paid before the investor receives the benefit.
  • Affinity fraud: Affinity fraud involves a perpetrator who targets members of certain groups (such as the elderly or a specific ethnic or religious community) by pretending to be a member of the group and enlisting respected leaders of the group to spread the word about the scheme. These schemes are particularly harmful to their victims because they exploit the trust and goodwill that exists among the group.
  • Ponzi schemes: A Ponzi scheme is an investment scam that pays existing investors with funds collected from new investors. The perpetrators promise to invest the new investors’ money and generate high returns with little or no risk. However, in most cases, the perpetrator simply uses the new investors’ funds to pay earlier investors and keeps a portion for themselves.

This list is by no means comprehensive, as fraudsters are always thinking up new ways of defrauding the public. Just because a broker’s fraudulent actions do not fit neatly into a common category of securities fraud does not mean that he or she cannot be held liable. We evaluate possible liability for securities fraud on a case-by-case basis and any legal remedies we pursue are always tailored to the client’s unique circumstances.

Signs That You May Have Been Defrauded

While securities fraudsters are criminals, they can also be very sophisticated criminals who are capable of defrauding their victims without the victim knowing about it immediately. This is especially true in cases where the fraudster takes advantage of a victim who is not well-versed in or comfortable with financial matters. If you suspect that you might have been the victim of securities or stockbroker fraud, ask yourself if you have experienced any of the following common signs of securities fraud:

  • Your broker (or the person who sold you the security) does not return your phone calls
  • The transactions on your statements do not make sense to you
  • You see a significant drop in the value of your stock over a short period of time
  • Most of the investments recommended to you by the broker are declining in value
  • You are losing money in an “up” market
  • Your account statements include transactions you did not authorize
  • Your broker fails to disclose important information about your investments
  • Your financial results are different from what you expected or what was promised to you
  • Your broker engaged in aggressive sales tactics to pressure you into the purchase

Although these warning signs do not automatically mean that you are a victim of fraud, they can alert you to possible deceptive or fraudulent practices that could cause you financial harm in the future. They are also a good indication that you should seek the advice of a knowledgeable California securities fraud attorney to determine whether any fraudulent behavior has occurred.

An Attorney Can Help You Prove Securities Fraud

Securities fraud in California violates both State law and federal law and is actionable under both sets of securities law. California prohibits fraud in the offer and sale of securities, under California Corporations Code Section 25401, which makes it illegal to offer, sell or purchase securities through untrue statements or omissions of a material fact.  Insider trading is also a violation of California securities law.  See California Corporations Code § 15402.

Federal securities fraud allegations are generally brought under Section 240.10b-5 of Title 17of the Code of Federal Regulations, known as Rule 10b-5 in securities fraud litigation.  Rule 10b-5 establishes legal liability for brokers who engage in securities fraud:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

  1. To employ any device, scheme, or artifice to defraud,
  2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
  3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

In practice, § 240.10b-5 roughly translates into five elements that you must prove in order to prevail on a claim for fraud against a broker:

  1. A deceit by the broker through the omission or misrepresentation of information
  2. The omitted or misrepresented information was material (i.e., the information must be important to an investor when deciding whether to purchase the security)
  3. You relied on the omitted or misrepresented information when deciding whether to purchase the security
  4. The omitted or misrepresented information directly induced you to purchase the security
  5. You suffered financial harm as a result of the transaction

If this sounds complicated to you, don’t worry. An experienced securities fraud lawyer can help you identify signs of fraud and gather evidence to use in your case against your broker or financial institution.

Contact a California Securities Fraud Lawyer

If you think that you might have been the victim of securities or stockbroker fraud, it could be in your best interest to talk over your concerns with an experienced, California securities fraud lawyer. Contact Ingrid M. Evans and the other securities fraud attorneys at the Evans Law Firm for a free consultation by calling (415) 441-8669 or by email. We can help guide your case through a jury trial or toward an equitable settlement.

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