How to Spot Investment Fraud
The Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the North American Securities Administrators Association (“NASAA”) are responsible for, in part, protecting investors from securities fraud. In addition, each state has its own department and security regulations to monitor the sale of securities and regulate financial service firms and professionals in that state. Despite multiple agencies responsible for overseeing the industry and protecting investors, fraudsters are still able to find ways to take advantage of trusting and unsuspecting victims.
Affinity fraud is a common type of investment scam where fraudsters target victims who share a common bond (religion, ethnicity, profession, etc.). The fraudster’s goal in an affinity fraud is to establish a relationship with the members of the group based on their shared bond, then exploit their trust. According to Richard Best, the Regional Director of the SEC in Utah, the State of Utah investigates numerous fraud cases every year. Best faults investors for being too trusting “because that same trust factor that will cause someone to give that fraudster money without adequately checking that investment or the individual who is offering it."
Frauds are frequently difficult to identify, as many go unreported. For example, Indiana investigates hundreds of fraud claims each year by alleged financial advisors. However, many victims refuse to come forward because they feel embarrassed. According to Indiana’s Secretary of State, Connie Lawson, approximately 200 securities fraud complaints are filed each year with the Secretary of State, with about 60 active cases at any time. Lawson acknowledges this as a significant problem, stating “[s]ome of these cases take us years and we do an extensive amount of work outside of Indiana because of a crime that was committed in Indiana.”
Fraudsters are continuously finding new and creative ways of reaching their victims, such as joining Christian dating sites. Since 2007, Indiana has convicted over 95 individuals as a result of some type of securities fraud, and recovered $110 million in restitution for investors.
Investors are advised to conduct thorough due diligence prior to engaging in securities transactions by researching the investments, as well as the financial professional and entity soliciting the product, asking questions, and requesting written documentation about the product. Investors should also be wary of red flags, such as requirements that the investment be made within a short time period, and promises that the investment is risk-free and/or guaranteed to generate a certain rate of return.
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About Christine Goodrich
Christine E. Goodrich is a Senior Associate with Faruqi & Faruqi, LLP’s New York City office. Ms. Goodrich’s practice is focused in securities arbitration, litigation and regulation.