What Beginner Investors Need to Know About Securities Fraud

As a newbie investor, navigating this part of the financial sector may seem rather overwhelming at first.

We are taught that investing in the best properties is the mark of a savvy investor, but how can we even begin to know which stocks to set our sights on given the amount of turbulence in the markets?

The whole endeavor is far more complicated than what the traditional literature on investing would have you believe. Securities fraud is a major issue, one to which many new investors fall prey.

The number of people investing in commodities and securities through their retirement accounts or college savings plans has increased exponentially in the past few decades.

However, this has also gone hand in hand with a tremendous amount of fraud arising in pretty much all financial markets. The following are a few things you need to know to protect yourself and know how to best deal with your broker.

Different Kinds of Security Fraud

To put it simply, securities fraud refers to cases where investors are deceived or the financial markets are manipulated.

The most common types of securities fraud are accounting fraud, insider trading, or misrepresentations that intentionally mislead the investor. Here is a breakdown of each:

Accounting Fraud

Accounting fraud usually takes place when an organization intentionally keeps inaccurate records to intentionally disseminate false information about the company’s financial standing in order to secure a loan or other benefits that they wouldn’t qualify for if the truth were known.

Many corrupt businessmen have been accused of doing just that, and it is a massive felony that can land people in jail for years if caught. 

Insider Trading

This usually takes place in a corporate setting and involves illegal trading of securities by people on the inside who have acquired valuable information that is not yet disclosed to the general public.

A good example of this is the accusation that some key senators in congress divested from key investments on the eve of the lockdowns back in March 2020 just as the COVID-19 crisis was coming to a head.

The senators found out about potential volatility in the stock market at the onset of the crisis before the public, and allegedly offloaded the “poisoned” assets before it could hurt their financial portfolio – this is a crime.


This is the sort of crime that is mostly perpetrated by brokers, financial advisors, and money managers, who declare inaccurate information to investors.

These can be especially nefarious and recent cases have shown people to be defrauded of millions of dollars because of unscrupulous brokers willing to do anything for a quick buck.

While individuals within a company can be accused of insider trading or accounting fraud, this type of securities fraud casts a very wide net. 

How to Locate a Scam

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Now that you know very broadly the kinds of maleficence to be on the lookout for, you’ll need to get savvy at locating a scam. It’s one thing to know what is securities fraud, but it’s another to properly identify the different forms they can take.

High yield investment frauds are common, and they entail promises of high returns with minimal or no risk.

They usually take the form of Ponzi schemes, or pyramid schemes, in which money is collected from unsuspecting traders in exchange for incredible returns on their investments.

Some initial high payouts are made, which secures the investors’ trust, but in reality, no legitimate investment is made and massive fraud is occurring behind the scenes.

Another common scheme is called an advance-fee in which a broker will ask an investor to pay a small amount of money upfront to supposedly help cover the processing of fees or the taxes in order to secure a lucrative investment opportunity. Said opportunity is really just smoke and mirrors, and the scammers run away with the investors’ money. 

Another popular form of securities fraud out there is market manipulation schemes.

These tend to occur with less popular stocks that have a low trading volume, and the aim is to inflate the stock price in an aggressive way so as to deceive investors and encourage them to buy them at high levels.

This allows fraudsters to sell their shares and receive a significant profit at the expense of investors who have been tricked by the idea that they are investing in something that will bring them riches.

These schemes are so prevalent that they have actually led to billions of dollars in losses since they can discourage the investors and project powerful – albeit entirely inaccurate – ideas about the stocks in question.

How to Prevent Fraud

To prevent being hoodwinked by brokers or financial managers with bad intentions, you need to be on the lookout for a few warning signs.

For sure anyone offering you exorbitantly high returns or asks for money upfront to cover some random costs should be avoided at all costs. But to find your way around a more enterprising criminal, there are a few more interventions you should take into consideration.

For one, always make sure to request written copies of relevant financial documents that will help you determine whether they match up to the information your broker shares with you orally.

Take note of any discrepancy. Also, steer clear of any hard-sell tactics, or a broker who tries to strong-arm you into making an investment that you’re not entirely convinced about.

Any big claims made about stocks that aren’t backed up by clear evidence should be avoided like the plague. Finally, if you suspect that something may have gone wrong with your finances, call an attorney immediately. Don’t wait for the fraud to happen in its entirety; try to secure help as soon as possible.

Whether you are a newbie or a relatively experienced and savvy investor, you must always be on the lookout for these fraudulent tactics.

There are plenty of schemes that aim to take advantage of vulnerable investors, and it is of paramount importance that you protect your finances as well as your emotional wellbeing from being defrauded.

So, before you invest your hard-earned cash, do the research, only take calculated risks, and no matter how convincing they may be, never trust a hype man.