Investment fraud as defined by New York law is the intentional use of deception to persuade investors to make financial decisions based on false information. In other words, those who convince others to invest money by way of false information into something they know is either non-existent or not what the money in intended for can be charged with investment fraud. Other terms for investment fraud are stock fraud or securities fraud.
Having an experienced lawyer on your side may impact the outcome of your case. These are very serious charges that carry immense penalties if convicted; the sooner you act the better. Also, you should find a lawyer immediately if you or your company is under investigation for investment fraud. The governments’ ability to bring charges will be limited the sooner you obtain a criminal defense lawyer.
The most common types of investment fraud are insider trading and stock manipulation; however, there are many other crimes that are encompassed under investment fraud. Investment fraud includes but is not limited to:
- Insider Trading
- Ponzi Schemes
- Telemarketer Fraud
- Accounting Fraud
- Real Estate Fraud
- Blind Pools
- Nigerian Letter Schemes
- Estate Financing Fraud
- Timeshare Fraud
- Dummy Corporations
- Boiler Rooms
- Mutual Fund Fraud
- Short Selling Abuse
- Internet Pump and Dump Schemes
There are many different schemes related to investment fraud, each one is specific to the type of fraud being committed. For example, telemarketer fraud is when someone tries to get a person to send them money or obtain their personal information over the phone.
The telemarketer scheme includes telling the caller the following things:
- Act now or the offer expires
- You have won money or a free gift
- You owe a utility debt and the caller demands personal information to verify your identity before they proceed
The Nigerian letter scheme has gained popularity and unfortunately many victims have fallen for this scheme. You get an e-mail saying you won some type of lottery and request you pay a fee upfront before they send the rest of the money.
Ponzi schemes operate by promising a return to investors from new capitol instead of profits. They tend to offer very high returns but the money comes from continuous investments from the new investors and not from any actual profit.
These are just a few different types of schemes used in investment frauds. The basis of most investment fraud schemes is to convince investors they will get a huge return for a small investment.
Those involved in investment fraud are often involved in other forms of white collar crime. Other crimes related to investment fraud include the following:
- Falsifying business records
- Money laundering
- Identity theft
- Counterfeit currency
Throughout the years there have been many regulations and legislations put in place to govern the investment industry. The top pieces of federal legislation are the following:
- Securities Act of 1993
- Securities Exchange Act of 1934
- Trust Indenture Act of 1939
- Investment Company Act of 1940
- Investment Advisers Act of 1940
- Sarbanes-Oxley Act of 2002
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
- Jumpstart Our Business Startups Act of 2012
The Investor protection Bureau enforces the Martin Act which is a New York securities law. Part of this law requires brokers, dealers, and security salespeople to register with the Attorney General. The other portion allows the Attorney General to investigate those suspected of fraud as well as bring criminal or civil charges against a person or company.
The Securities and Exchange Commission is primarily responsible for prosecuting securities fraud. Although each state does have their own set of laws regarding securities fraud as well as their own securities commission, these crimes are usually prosecuted as federal crimes. Penalties for investment fraud include but are not limited to:
- Fines – the amount of fines will be determined by the circumstances and exact type of fraud was committed. Fines can start as low as $10,000 or into the upper millions.
- Restitution – Courts often issue restitution in conjunction with other fines or incarceration time since the act of fraud has caused monetary loss to a person or company. It is very rare that a court will issue an order of only restitution in a securities fraud case.
- Probation – A defendant may be sentenced to probation if there was only a single act of fraud committed and no financial loss. The typical probation time for securities fraud is 5 years. The defendant will have to adhere to specific conditions of probation such as submit to drug tests, not commit any other crimes, paying fines or restitution, or any other condition he court sees fit.
- Incarceration – The standard prison sentence is 5 years per offense.
Having a successful defense to any investment fraud charges will depend on how fast you obtain a defense lawyer and how experienced they are in this type of fraud defense. Whether an investigation is taking place or charges have already been brought, do not waste time obtaining a qualified lawyer. These crimes are serious as are the consequences.
As previously stated, investment fraud is a white-collar crime prosecuted by the SEC as federal crimes. Very rarely will an investment fraud charge be prosecuted under state law. State laws are less severe with lesser penalties; most likely one of the reasons investment fraud is prosecuted in federal court.
Perhaps the most well-known high profile case is that involving Bernie Madoff and his Ponzi scheme. Madoff ran the largest Ponzi scheme recorded for over two decades and scammed over $50 billion out of people. High profile investors such as Kevin Bacon and Steven Spielberg were affected by his scheme. Many large banks and pension funds were victims to Madoff. He pled guilty and is currently serving out his 150 year sentence in a maximum security prison.
Jordan Belfort was involved in a market manipulation scheme by means of the pump and dump method. He ran the firm Stratton Oakmont in the mid 90’s where brokers drove up stock prices then he and his partners cashed out which resulted in the stocks to plummet. He hired brokers to cold call people and had them sell stocks that were worthless. He was indicted in 1998 in which he served 22 months in prison and was ordered to pay $100 million in restitution.