Investment fraud is an issue that affects an untold number of investors each year. From unscrupulous brokers to fake investment “opportunities,” investors face numerous risks, and they must be diligent to protect themselves as best they can.
Recently, the U.S. Securities and Exchange Commission (SEC) has published several Investor Alerts and Bulletins focused on specific types of investors and investment products. For those who have questions or concerns, reading the SEC’s Investor Alerts can be a good place to start. Ideally, investors will use these resources to make informed decisions before they invest; but, we know that in many cases, investors don’t realize that they need help until they have already fallen victim to fraud.
If you believe you may have suffered fraudulent investment losses, you should speak with an investment fraud attorney promptly. We encourage you to use the information in this article to gain a better understanding of your situation, and then we invite you to contact us for a free and confidential consultation.
If you are a retail investor, here is what the SEC wants you to know about investment fraud in 2022:
Understanding the Risks of Trading on Margin
Margin trading allows investors to invest more than they own. While margin trading used to be the domain of Wall Street, investment apps have opened up margin trading to retail investors across the United States.
So, what is margin trading? Essentially, trading on margin involves taking out a loan. You borrow money to invest—with the goal of generating returns that exceed the interest rate on your loan.
Perhaps you can already start to see the danger. If your investments do not perform as you expect (or hope), not only can you lose your principal, but you can also end up in debt. Of course, many brokerage firms—and many investment apps—try to sweep this detail under the rug. They want you to borrow their money, because they get to charge interest regardless of how your investments perform. If things get too risky, they can issue a “margin call,” which requires you to deposit additional capital. If you are unable to make your interest payments or repay the loan, they can take legal action to enforce your payment obligations.
Failing to disclose the risks of margin trading, concealing information about interest rates or other fees, and engaging in improper margin call or collection practices are all common forms of investment fraud.
Make Sure You Know Your Broker or Investment Advisor
In an Investor Alert issued last year, the SEC warned of fraudsters posting as brokers and investment advisors. It noted that fake websites and social media profiles are becoming increasingly common, and that many scam artists are using cold calls and unsolicited emails to target retail investors.
While the risk of hiring someone who is posing as a broker or investment advisor is very real, the even greater risk for most retail investors is the risk of hiring a registered or licensed professional who engages in fraudulent conduct. Broker fraud is extremely common, and investors who hire registered and licensed professionals can face risks ranging from unsuitable investment advice and excessive trading to theft of their cash and securities.
With this in mind, before investing with a broker or investment advisor, it is imperative that retail investors do their due diligence. Investors should meet with their brokers or advisors one-on-one, review their BrokerCheck records, and seek referrals from friends and family. Choosing the wrong broker or investment advisor can have devastating consequences; and, while no one can make their decision with absolute certainty, it is possible to make an informed decision.
Watch Out for Fraudulent COVID-19 Investment Claims
Even as the COVID-19 pandemic fell out of the headlines in early 2022, the SEC was warning investors about the risk of fraudulent COVID-19 investment claims. As the SEC explained on May 31, “Since the beginning of the COVID-19 pandemic, the SEC has brought numerous enforcement actions against companies for making false and misleading claims about purported COVID-19 related products . . . . In addition to bringing enforcement actions, the SEC has suspended trading in dozens of companies in connection with COVID-19 related statements.”
Fraudulent COVID-19 claims are just the latest iteration of a type of investment fraud scam focused on creating hype in order to attract unsuspecting investors. As the SEC notes, these are often pump-and-dump schemes, in which fraudsters seek to falsely inflate the price of a stock by generating interest so that they can sell for a profit before the price comes crashing back down.
While investing in a company that appears to offer a promising COVID-19 test or treatment might seem like a good idea, investors need to consider several factors when making their investment decisions. This includes—but is by no means limited to—considering the source of the information. Unsolicited investment “opportunities” should always be viewed with skepticism; and, if you cannot verify what should be very big news from multiple sources, this is a red flag as well.
Watch Out for Cryptocurrency Investment Fraud Scams
The SEC has also issued several Investor Alerts pertaining to cryptocurrency investment fraud scams. Most recently, the SEC warned that, “[f]raudsters continue to exploit the rising popularity of digital assets to lure retail investors into scams, often leading to devastating losses.” These scams often promote new initial coin offerings (ICOs) and cryptocurrencies, typically through promotion on social media and “testimonial”-style videos.
In addition to ICO and coin scams, the SEC has also recently warned of scams involving Bitcoin futures. With Bitcoin’s inherent unpredictability being magnified by the recent market turmoil, many investors are turning to futures to mitigate their risk—banking on the fact that Bitcoin will ultimately weather the storm. In many cases, scammers are promoting these investments to individuals with little (if any) investment experience, and they are relying on investors’ fear of missing out to push them into making decisions without doing their research.
Retail investors also need to be careful when investing in “crypto stocks,” or shares of companies involved in the cryptocurrency world in some capacity. For example, in May the SEC charged NVIDIA Corporation with making inadequate disclosures about the impact of cryptomining. The SEC alleged that the company failed to disclose that “cryptomining was a significant element of its material revenue growth from the sale of its graphics processing units” in 2018, which effectively meant that investors did not realize they were relying on the continued rise of cryptocurrency to profit from their investments in the company’s shares.
College Students Need to Understand the Risks of Investing with Apps and Relying on Social Media
With the fall semester right around the corner, the SEC recently issued an Investor Bulletin advising college students to think carefully before investing. With the rise of investment apps like Robinhood and Acorns, college students have unprecedented access to all types of investments, from stocks and bonds to cryptocurrencies and complex alternative investments.
As the SEC notes, these apps often “include default notification settings that automatically send you information about investment products and strategies you may not want or need,” and college students must “[b]e extra careful when buying or selling options, investing in microcap stocks, using margin to buy stocks, or selling stocks short.” If college students are not careful, they can easily find themselves in debt without realizing what they have gotten themselves into.
College students are also prime targets for fraud scams perpetrated through social media. Again, unsolicited investment offers are almost always fraudulent, and no one should ever make an investment decision based solely on information shared with them through social media.
Teachers (and Other Employees) Need to Monitor Their Accounts and Make Informed Decisions about Saving for Retirement
In its most recent Investor Bulletin, the SEC is advising teachers to pay close attention to their retirement investments. Unfortunately, fraudulent practices affecting teachers’ (and other employees’) retirement savings are also a very real concern, and many retirement savers find themselves needing to seek recourse for ERISA violations.
The SEC recommends that teachers carefully select their 403(b) plan vendors and the specific products in which they invest. When in doubt, teachers should consult with their investment professionals. As the SEC notes, “[s]omeone is making money from your investment,” and it is important to make sure that you are not paying excessive fees or commissions. Teachers (and other employees) should monitor their retirement accounts for signs of mismanagement, theft and other fraudulent practices as well. If you have concerns about investment fraud, you should not ignore them, but instead seek advice from an experienced attorney.
Speak with an Attorney at Zamansky LLC about Investment Fraud
If you believe you may be a victim of any type of investment fraud, you should speak with an attorney promptly. It may be possible to recover your fraudulent losses through FINRA arbitration. To schedule a free and confidential consultation at Zamansky LLC, please call 212-742-1414 or tell us how we can help online today.