Investment Fraud FAQ

Investment Fraud FAQ Related Information:

What is investment fraud?

Investment fraud actually covers a myriad of fraudulent activities that concern the savings and investments of others. Over recent years, this type of fraud has become far more sophisticated, and even the most savvy of investors risks being duped by investment fraud schemes.

Who is at risk from investment fraud?

Basically, any investor runs the risk of being conned by a fraudster in an investment scheme scandal. It is a case of ensuring that you don’t fall for ‘get rich quick’ and ‘too good to be true’ schemes, and try and focus your investments in reputable and respected areas. People perpetrating investment fraud usually target senior citizens and older people. Firstly, because they often have considerable savings to invest in such schemes; and secondly because they seem to be more gullible than younger people. However, the more sophisticated this fraud becomes, the larger the target group becomes.

How do fraudulent scheme get people to make investments in the first place?

Investment fraud schemes usually offer you large growth in capital, much higher rates of interest on your investment, or both. Such schemes typically have some time frame in which they must be invested in, or else you lose your chance to make good money.

If any kind of investment scheme sounds too good to be true, it probably is, and you should be suspicious of such investment arenas. If someone claims to give you very high returns on your money, for very little or no risk, you should investigate such claims before putting your money into these schemes.

Are there many types of investment fraud?

Yes, investment fraud is a growing ‘business’ and fraudsters have found ways in infiltrate practically every area of investment. You will find investment fraud evident in areas such as bonds, mutual funds, savings, securities, Internet investments, and many other areas.

What should I do before I invest to avoid being a victim of fraud?

If you are thinking of investing in a new or unknown entity, you should always exercise extreme caution. Do a little background work, find out about the scheme, and see whether it is a viable investment option. If there is anything suspicious or you are uncomfortable about it, go with your instincts. If it sounds too good to be true, it probably is. ‘Look before you leap’ or in the case of investments, ‘Inspect before you invest’ is the only way to avoid becoming a victim of investment fraud.

How does mutual fund fraud work?

There are a number of ways in which mutual fund fraud can be carried out. This includes:

• Preferential Treatment, where many mutual fund managers have tie-ups with certain brokers and brokerage houses, who ‘sell’ these funds to their customers, in exchange for some commission or other payments receivable from the fund
• Late trading: The prices of mutual fund shares are fixed at the time of closing of trading, which is 4.00 pm each day. It is illegal to trade in mutual fund shares after this time. But some companies allow insiders or valuable clients to indulge in late trading and take advantage of events that occur after the markets close.
• Timing the Markets: This is another practice that is unethical and is being used to commit mutual fund fraud. People who ‘time’ the markets, indulge in quick buying and selling of the mutual fund shares at stale prices (buying after market closes) and then selling the shares for a profit, on the next day when the market opens.

What is a churning scam?

This is when a broker indulges in trading in a client’s account, not in the course of regular investment activity, but to generate extra income on the basis of additional commission. Such activity is illegal and the broker is said to be involved in a churning scam.

How do you prove a churning scam in order to take action?

In order to prove churning, and file a legal claim of broker related investment fraud, an investor needs to prove that the following hold to be true:

• The broker/ investment advisor was the one who actually executed the transactions in the account of the client.
• Such transactions and trade, and the accruing commission are much more than what can be considered normal.
• Such actions were carried out knowingly and with complete disregard to the best interests of the client.