For any investor, recognizing a good market is essential. However, several schemes exist designed to get investors to shell out countless amounts of money only for them to lose that money they’ve invested. Many schemes take the vulnerability and inexperience of investors for granted. In the end, it’s the investor who loses the most.
While many people have heard of pyramid schemes — one person makes money, and the person above him or her makes more money, and so on — several schemes exist to defraud investors. It’s essential to recognize what investment fraud schemes exist.
These are some common investment fraud schemes:
- Ponzi schemes
- Hedge Funds
- Conflicts of interests
- Penny stocks
At Vernon Litigation Group, we want investors to be as safe as possible whenever dealing with brokers and spending money on investments. As such, we explain more about these common investment fraud schemes below, so you know what to expect as an investor.
Ponzi schemes are similar to pyramid schemes in that they promise investors a high rate of return on their money, but only after it takes money from other investors. The more people who invest in the Ponzi scheme, the more money older investors make. However, newer investors are promised a significant profit at low risk, but new investments pay older investors.
Recognizing Ponzi schemes means being aware of companies that work hard to attract new investors.
A hedge fund refers to a partnership involving private investments. Hedge fund managers are responsible for the investment, and they profit by receiving a percentage of the profit return to the investor. Unfortunately, these types of investments are not as firmly regulated as they should be.
When hedge fund managers make misleading statements, withhold valuable information, and wrongfully cause investors to lose money,
When you trust a broker with your finances and investments, you hope that they will make intelligent decisions. However, it helps to remember that brokers work on commissions. Churning refers to the act of excessively buying and selling securities to create more commission. They do this out of their own best interests, overlooking investors’ needs — an illegal breach of their duty.
Often, churning involves brokers investing in high-risk investments not suitable for their investors.
Conflicts of Interest
A broker’s fundamental responsibility is to ensure they are looking for investments that suit the needs of their investors. This duty means making sound investments based on the intended risk level. Unfortunately, brokers often create a conflict of interests, investing more aggressively to increase commissions.
Conflicts of interest can occur when brokers serve in multiple positions for a single transaction. They act as the advisor, underwriter, lender, and other functions, working the trade in their favor.
Penny stocks are typically those on the market that sell for less than $5 per share, according to the United States Securities and Exchange Commission (SEC). Unfortunately, these are the stocks that many scammers use to get inexperienced investors to put money in companies that won’t provide them with profits.
Instead, brokers reap the benefits. Investors must do their research if a broker ever approaches them regarding a penny stock.
At Vernon Litigation Group, we work to help investors safeguard their rights. We know that if a broker acts outside of their responsibility, they can cause investors to lose significant amounts of money. As such, we work to hold those negligent brokers accountable.
Our Naples litigation lawyers go above and beyond for investors. We have experience and knowledge regarding various investment scams, and we know what it takes to help our clients when they need us most.