Issue name: Securities Theft
Applicable law/agency: Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD)
Related topics: Securities, Stock Market Losses, Breach of Fiduciary Duty, Unauthorized Trading
Financial Securities Theft
Theft occurs when a broker takes money from clients’ personal accounts for the broker’s personal use without knowledge of the client. While the securities industry is highly regulated, by both the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD), theft and fraud still occur. Many types of fraud and theft have been reported by the NASD. These may include, but are not limited to, transactions in discretionary accounts in excess of that approved by a client, unauthorized transactions or unauthorized borrowing or use of a client’s assets.
Internet Investment Fraud Continues to Rise
In late 2005, the Securities Exchange Commission (SEC) issued an investor alert about the rise of Internet investment scams. These types of securities thefts or fraud continue to climb, as it is difficult for potential investors to identify the validity and authenticity of information on the Internet. Websites and other sources on the Internet can be easily created by thieves and often look “real”. As technology and software programs become more sophisticated, these sites will be even more common.
The SEC created the Office of Internet Enforcement specifically designed to fight Internet theft/fraud, including investment schemes. The SEC requires that all online communications that recommend stocks disclose the person or the entity that paid for the communication, including the amount and type of the payment. The SEC has brought many enforcement cases in the past ten years that involve violations of this law regarding financial investments or securities.
There are thousands of online investment newsletters, online bulletin boards, chat rooms, knowledge areas and investment groups on the Internet. Many of these offer investors what appears to be unbiased information free of charge about featured companies or the site may recommend “stock picks of the month.” Some companies pay people to write online financial newsletters to “tout” or recommend their stocks. Although this is not illegal, federal securities law requires that the newsletters disclose who paid them along with the amount and the type of the payment. Many fraudsters fail to do this and are dishonest about the payments they receive, their independence, the so-called research performed, and their records of accomplishment. These newsletters often masquerade as sources of unbiased information, when actually there is a profit if the scam artists convince investors to buy or sell the particular stocks they represent.
In some of the worst cases, the thieves “scalp” the stocks they publicize, driving up the price of the stock with the baseless recommendations and then they sell their own holdings at high prices for big profits. The thieves profit and the investors generally always lose. There are some legitimate online newsletters that can help investors gather valuable information on financial investment, but the majority of online newsletters are tools for fraud. It is important to check the credentials of the company that “owns” the newsletter before following any of the advice provided in the newsletter.
Online bulletin boards are another popular forum for investors to share information. Bulletin boards typically feature “threads” made up of numerous messages on various investment opportunities. Fraudsters often pump up a company or pretend to reveal “inside” information about upcoming announcements, new products, or lucrative contracts. In addition, people claiming to be unbiased observers who have carefully researched the company are sometimes company insiders, large shareholders, or paid promoters. It is easy to create the illusion of widespread interest in a small, thinly traded stock by a single person by posting a series of messages under various aliases.
Individuals should never make an investment based solely upon information in an online newsletter, bulletin board posting or email. This is even more critical if the investment involves a small, thinly traded company or a company that does not file regular reports with the SEC.
Federal securities laws require most public companies to register with the SEC and to file annual reports containing audited financial statements. This includes all U.S. companies with more than 500 investors and $10 million in net assets and all companies that list their securities on the NASDAQ Stock Market or a major national stock exchange such as the New York Stock Exchange.
Some companies do not have to register their securities or file reports. These include companies who are raising less than $5 million in a 12-month period. They must file a hard copy of the “offering circular” with the SEC containing financial statements and other information. In addition, smaller companies raising less than one million dollars do not have to register with the SEC, but they must file a brief notice that includes the names and addresses of owners and stock promoters.
The FBI’s Internet Fraud Complaint Center (IFCC), a joint project with the Department of Justice (DOJ), recently reported that most Internet fraud complaints stem from online auctions; however, the second most common Internet fraud was investment fraud. Recent statistics approximate Internet investment fraud amounts to losses of over $10 billion per year.
The SEC actively investigates allegations of Internet investment fraud and is currently working to accelerate their time line in stopping these types of thefts and frauds. The SEC coordinates with federal and state criminal authorities to prosecute Internet fraudsters and to help individuals recover losses. Securities attorneys can assist investors who have been the victim of Internet financial crimes and help to increase their chance of recovering financial investments.