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Recent SEC Enforcement Actions Highlight Hidden Risks for Investors

August 22, 2023 Blog

One of the most common mistakes investors make is putting their money in without taking the time to fully research the securities or other assets in which they are investing. State and federal securities laws require publicly-traded companies, brokerage firms and other entities to make multiple types of disclosures—and these requirements are intended specifically to ensure that investors are able to make informed investment decisions.

But what if you do your research and you still end up making an investment decision based on less-than-complete (or misleading) information?

Unfortunately, this is a very real concern. Disclosure violations are common, and these violations can present significant hidden risks for investors. While there will be red flags in some cases, oftentimes, investors will have no reason to suspect that they are being misled. A few recent U.S. Securities and Exchange Commission (SEC) enforcement actions highlight these hidden risks.

3 Recent Examples of SEC Cases Involving Hidden Risks for Investors

Here are three examples of recent SEC enforcement actions in which the Commission alleges that the defendants’ misrepresentations and omissions led to fraudulent investment losses:

1. Investment Advisor Charged with Misrepresenting Hypothetical Performance Data

On August 21, 2023, the SEC charged an investment advisory firm headquartered in New York City with using misleading hypothetical performance metrics in its advertising materials. According to the SEC:

“[The firm] made misleading statements . . . regarding hypothetical performance, including by advertising ‘annualized’ performance results as high as 2,700 percent . . . . [and by] fail[ing] to include material information, for example, that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year.”

While the SEC allows the use of hypothetical performance figures, these figures are subject to the same rules and requirements as all other advertisements. Among other things, this means that they must be accurate and non-misleading. If a company or firm publishes hypothetical figures without explaining their basis or without clearly disclosing that they are not representative of actual performance, this can (and often does) lead investors into risky investment decisions.

2. SEC: Fund Administrator’s Ignorance of Red Flags Led to Investor Losses

Many investors rely on fund administrators to help them make informed investment decisions. On August 7, 2023, the SEC filed charges against a Florida-based fund administrator who is accused of improperly using net asset value (which does not recognize losses) to calculate the value of investors’ interests. This, according to the SEC, resulted in the administrator “sen[ding] investors account statements that materially overstated the value of their investments.”

As the SEC notes, “Fund administrators are important gatekeepers in the private fund space.” In this case, the SEC alleges that the fund administrator missed “clear red flags,” including the fact that the fund under administration was run by two partners whom the SEC had charged with fraud in May 2022. When investors can’t rely on their advisors or fund administrators to identify these types of red flags, they can face losses despite doing their best to choose a trustworthy investment professional.

3. SEC: SPAC “Mischaracterized and Omitted” Material Information in Public Filings

Last year, the SEC alleged that a special purpose acquisition company (SPAC) had misled investors by making false statements in its public filings with the SEC, including Forms S-1 and S-4. As the SEC explains, the purpose of an SPAC “is to identify and acquire an operating business. As such, steps taken by a SPAC in furtherance of a particular acquisition are important to investors.”

According to the SEC, the SPAC’s filings contained several false statements and omissions, including a failure to disclose a material conflict of interest. The SEC described this failure as “particularly problematic” due to the fact that “investors focus on factors such as the SPAC’s management team and potential merger targets when making financial decisions.”

For many prospective investors, a company’s public filings are among the first—and supposedly most reliable—sources of information they utilize. But, while investors expect companies’ public filings to be accurate, this isn’t always the case. Thus, false and misleading public filings are a hidden risk as well, and they are a risk that it can be difficult for investors to avoid.

What Are Your Legal Rights if You Were Misled Into Investment Losses?

What if you learned after investing that you received inaccurate or misleading information? In this scenario, you may have a claim for investment fraud. Firms, companies, fund administrators, and other entities and individuals can be held liable for misleading investors into bad investment decisions.

Investors have two main options for filing investment fraud claims. The first option is pursuing securities litigation. Securities litigation is used to enforce investors’ rights against publicly-traded companies and other types of entities and individuals in cases involving public disclosure violations, investment scams and other types of securities fraud.

The second option is pursuing FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) works alongside the SEC to regulate the brokerage industry in the United States. Brokers must register with FINRA, and they must consent to arbitration as a condition of registration. FINRA arbitration is generally more efficient than securities litigation, so pursuing arbitration (when it is an option) will make sense in most cases.

Regardless of what you need to do to protect your legal rights, if you believe you may be a victim of investment fraud, you should speak with a lawyer promptly. Taking legal action quickly can be important in some cases, and it can help to maximize your chances of a financial recovery.

Discuss Your Legal Rights with an Investment Lawyer at Zamansky LLC

Do you have concerns about investment fraud? If so, we encourage you to contact us promptly to discuss your legal rights in confidence. We represent investors in securities litigation and FINRA arbitration nationwide. To speak with an investment lawyer at Zamansky LLC in confidence as soon as possible, call 212-742-1414 or tell us how we can reach you online now.

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