What Is Investment Fraud?
Investment fraud is any scheme or deception relating to investments that affect a person or company.
The term "insider trading" can refer to legal or illegal trades. Insider trading is legal when corporate insiders—officers, directors, and key employees—buy and sell shares of their company. The United States Securities and Exchanges Commissions (SEC) keep a record of all trades conducted by corporate insiders.
Types of Investment Fraud 1.illegal insider trading 2.fraudulent manipulation of the Stock Market 3.prime bank investment schemes
Investment fraud
Most consumers invest in traditional offerings--stocks, bonds, and commodities--that are regulated by the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and state securities regulators. However, many consumers also invest large sums in less traditional offerings that either are outside SEC and CFTC jurisdiction or subject to shared jurisdiction with the FTC. Among these are investments in tangibles (for example, rare coins, art, precious metals), oil and gas lottery application services, and telecommunications. In investment cases brought by the FTC in 1996, scam artists consistently took thousands of dollars from consumers. Among complaints in the FTC/NAAG Telemarketing Complaint System, investment fraud represents more than half of all consumer dollar injury reported, with an average loss of over $15,000 and losses as high as hundreds of thousands of dollars per consumer. In just two invention promotion cases challenged by the FTC in 1996, defendants took more than $100 million from thousands of consumers over the life of the frauds, following obviously effective advertising on several national cable stations by the fraud promoters.
Fraudulent investment promoters typically use aggressive marketing tools such as infomercials and telemarketing to reach consumers. They also flout state and federal securities registration laws. That way, their promotional materials--including profit projections, use of proceeds, and risk disclosures--are not subject to routine regulatory scrutiny.(11) Consumers may believe that a scheme's slick promotional materials with fine-print risk disclosures fully set forth the investment's profit potential and risks. Instead, the Securities and Exchange Commission warns that "investors must be aware that their first line of defense against telecommunications technology and other securities fraud is their own diligence and skepticism in evaluating a proposed investment--especially one not registered with the [Securities and Exchange] Commission."
Investment fraud, like telemarketing fraud in general, often targets older people, who may be least able to afford the hit to their savings accounts. As the AARP and the Consumer Federation of America recently reported to the SEC, "[b]ecause their prime earning years have passed and the sources of extraordinary income may be one-time life events, older Americans are less able to repair the damage when they are the victims of fraud or abuse."
By late 1995, fraudulent telemarketers were offering to acquire FCC paging licenses for consumers for hefty prices, claiming to put consumers in control of the airwaves so that paging companies would lease or buy the rights to use airwaves from them. Fraud promoters told consumers they could boost their previous "investments" by acquiring new, purportedly profitable, paging licenses. These scam artists published success stories of real investors in these fields to tout fraudulent offerings. Indeed, many defendants in FTC law enforcement actions simply hyped the information superhighway as the primary reason to invest in such offerings. These high-tech investment frauds alone cost consumers millions of dollars--almost 15 percent of all consumer losses reported in the FTC/NAAG Telemarketing Complaint System by December 31, 1996. In recent years, both the FTC and the SEC have brought many individual enforcement actions involving these high-tech investments.
In addition, fraudulent promoters fill imitation security offerings with "investment opportunities" that mimic the legitimate investments in the headlines. For example, during the telecommunications boom in the mid-1980s, news stories reported that telecommunications businesses were reaping tremendous wealth. Scam artists created investment schemes that imitated legitimate entrepreneurs, and told consumers that their investment offerings were acquiring Federal Communications Commission (FCC) licenses or capitalizing telecommunications systems, such as cellular phone, wireless cable systems, Specialized Mobile Radio, and Interactive Video Data Service companies.(13) Fraudulent promoters falsely touted these ventures as high-profit, low-risk investments, even though they were high-risk, long-term, and capital-intensive.
FTC Actions
Significant achievements in the area of investment fraud reflect the FTC's use of collaborative, innovative law enforcement measures and education messages to help fight aggressive and inventive investment fraud:
Project Roadblock
In January 1996, the FTC coordinated federal and state law enforcement actions against fraud promoters peddling FCC paging licenses and 900-number companies as investments. In "Project Roadblock," the FTC and 21 states filed 85 law enforcement actions against companies touting information superhighway investments that took more than a quarter of a billion dollars from consumers.
Based in part on Project Roadblock data, the FCC eventually suspended the acceptance of paging applications pending further review of its procedures and adjustments to its licensing processes. Said the FCC: "The freeze is necessary to combat telemarketing schemes involving paging application fraud."(14) By the end of 1996, Project Roadblock's law enforcement, consumer education, and FCC reforms had put the lid on a significant source of investment fraud in the 1990s.
The FTC and the FCC also launched a consumer education campaign to raise awareness of fraudulent sales of FCC licenses as investments. Using Project Roadblock data, the two agencies determined that fraud promoters had combed a publicly accessible FCC database, identified fraud victims who had become license holders, and "reloaded" them with fraudulent offers of paging licenses. In response to this marketing technique, the FCC and FTC mailed 17,000 brochures to these same people to help them identify and report their losses and alert them to the danger of being "reloaded" in recovery scams. The FCC also included consumer alerts with each FCC license at issue. Consumers got the message: Once the project was completed, reports of suspected FCC license scams increased 397 percent.
Challenging Fraud on the Internet
Old investment fraud schemes turned up in new disguises in 1996. In September, the FTC charged several defendants in FTC v. Fortuna Alliance, L.L.C. et al. with making fraudulent earnings claims in connection with an unlawful pyramid sales scheme. (A pyramid is the investment fraud equivalent of a chain letter. Scam artists circulate investor funds to create the illusion of profits.) Fortuna Alliance induced consumers to invest in its scheme mostly by direct, person-to-person contact. In a '90s twist, it also used its web site, and clone sites of hundreds of members, to promote the scheme throughout the world. This sophisticated use of the Internet significantly enhanced Fortuna's credibility with potential investors and facilitated communications between Fortuna and its widely scattered team leaders. Fortuna could not have achieved widespread success as quickly without the Internet. When the FTC took action, Fortuna had taken in an estimated $13 million from over 25,000 consumers--about half of them outside the U.S.--in about six months.
Following the Money Off-Shore
The Fortuna Alliance case demonstrates that fraud promoters not only market their investments internationally, but transfer their assets across borders as well. The U.S. District Court for the Western District of Washington froze Fortuna's assets, then found three of the individual defendants to be in contempt of its orders because they failed to repatriate Fortuna funds they had transferred to Antigua. The FTC's effort to enforce the Court's asset freeze was accomplished with help from the Washington State Department of Financial Institutions.
The history of investment fraud demonstrates that fraud promoters look to the mainstream marketplace for ideas to imitate and for ways to induce consumers to invest. Law enforcement officials and consumers need to follow the headlines to forecast likely fraudulent investment schemes in 1997. Based on recent news stories fraud watchers can expect to see "too good to be true" pitches regarding Internet business investments and partnerships to build out new "information superhighway" communications systems. Fraud busters also will be looking for changing regulations affecting investments, because investment fraud promoters take advantage of changes in securities laws and telecommunications rules to come up with new investment fraud strategies
In FTC v. Online Communications, et al., another 1996 case, one of the defendants had transferred profits from the allegedly fraudulent, underlying enterprise to the Bahamas prior to the Court's entry of an order freezing the defendant's assets. The U.S. Department of Justice's Office of Foreign Litigation brought action in the Bahamas and obtained an injunction freezing the defendant's assets in the Bahamas.(15) The defendant agreed to settle the case and repatriate over $300,000 to the U.S. This was the first time the U.S. government obtained an asset freeze issued by a foreign court and returned the frozen funds for distribution to American telemarketing fraud victims.