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Investment fraud can be devastating. If you understand what it is and how it is perpetrated, you can protect yourself and others.
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Fraud is theft by deception, the deliberate use of some artifice or scheme to obtain something of value from another.
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Securities Fraud is a particular type of deception involving those financial instruments the law defines as securities.
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A security is a passive investment of money or something else of value, such as title to real estate, in a business venture in the expectation of earning a return on that investment. If you are an active participant in the operation of the business, your contribution does not constitute investment in a security. If you are donating money to a charity or religious organization without the expectation of earning interest or getting your money back, that is not an investment in a security.
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But if you give money to someone expecting to earn a profit or return on that money, you are investing in a security. The security itself can take many forms. Securities include shares of stock in a corporation, the loan of money represented by issue of a bond or promissory note, or ownership interest in a limited partnership.
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All investments carry some degree of risk. You may earn less than you expected, or even lose your money, but that does not necessarily mean you have been defrauded.
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Fraud occurs where the promoter or salesperson of the investment omits or fails to disclose material information, or makes false statements about the investment, its risk, or the financial background and regulatory history of the promoter selling the investment.
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In a fraud, the seller may falsify or even outright invent details about the underlying deal, conceal the fact that he or she has been disciplined in the past for violations of state or federal securities law, make misleading statements about the risks involved or the potential returns to be earned on investment.
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Securities Fraud occurs in the offer or sale of a security when any person:
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Employs any device, scheme or artifice to defraud;
Makes an untrue statement or fails to state a material fact where such would be misleading; or
Engages in an act or practice which operates as a fraud or deceit.
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The most common types of Securities Fraud include:
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PONZI SCHEMES: In a Ponzi, the promoter attracts investors by promising unrealistically high returns on their money. But because the underlying investment opportunity is either entirely fictional or because that investment cannot produce the promised profits, the promoter uses part of the money brought in by new investors to pay returns to earlier participants. The scheme lasts only as long as the promoter can continue to lure in new victims
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PYRAMIDS: Like Ponzis, pyramids depend on an ever-growing pool of new victims. Often disguised as multi-level marketing opportunities or even charitable endeavors, pyramids require victims to go out and recruit a certain number of new participants in order to “rise up” the pyramid and collect their promised reward. In this way, pyramid schemes spread tragically through families and communities, preying on the mutual trust people have for their friends, neighbors and co-workers.
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'PUMP and DUMP' STOCK SCAMS: In this fraud, unscrupulous promoters obtain large blocks of stock in a small, publicly traded company that has a relatively limited amount of stock available on the market. The promoters then circulate false or wildly exaggerated rumors about the company’s prospects, attempting to inflate the stock price by predicting the imminent release of some breakthrough technology, for example, or merger with another, larger company. When unsuspecting investors trading on those rumors drive the stock price up, the promoters dump their shares at a profit, leaving the other shareholders holding worthless stock.
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LIMITED PARTNERSHIPS: Also known as profit participations, partnerships are investment vehicles in which investors purchase a share in a business venture that generally has a specific goal in a relatively limited period of time, such as drilling oil or gas wells in a particular field, making a movie, or developing a real estate project. The general partner manages the project, pays the expenses, and distributes the profits, if any, to the limited partners. Unlike Ponzis or pyramids, partnerships can be a legitimate business tool. They become fraudulent where either the opportunity for earning a profit is misrepresented and the risks are not revealed, or where the managing partner manipulates the enterprise to drain off the revenues in “expenses,” leaving nothing for the investors.
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PROMISSORY NOTES: Like partnerships, promissory notes can be a legitimate tool for businesses that need to borrow money for short periods. It’s not investment fraud as long as the borrower discloses all the risks, and provides you with the information you need to make an informed decision. It is a fraud when backed by a non-existent company, or promoted by salespeople promising high returns with little or no risk.
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GLOBAL BANK SCHEMES: In these scams the promoter offers a ‘risk free’ opportunity to earn high returns by investing in exotic-sounding financial instruments traded in the global financial markets. The investment is often presented as a secret strategy shared only by very wealthy, sophisticated investors. In fact, the ‘major world bank’ may be no more than a fancy letterhead or a fake web page. Although the con artist may move the money overseas through foreign banks to cover his tracks, there is no real investment, and victims rarely recover their investment.
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For a checklist to help you avoid becoming a victim of Investment Fraud, go here:
Security and Exchange Commission
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To check the credentials of a New Mexico financial advisor or investment professional, go here:
New Mexico Securities Division, Licensing
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To file a complaint with the New Mexico Securities Division, go here:
New Mexico Securities Division, Complaint
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To file a complaint with the federal Securities and Exchange Commission (SEC)
or to provide the SEC with tips on potential securities law violations, go here:
www.sec.gov/complaint.shtml
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For a list of other helpful sources of information, go here:
New Mexico Securities Division, Regulation and Licensing Department
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