How to Spot and Avoid Securities Fraud: A Guide for Investors

Investing is one of the best ways to build your wealth and gain financial freedom. But where there’s money, there are scams.

Securities fraud is a real and growing threat, with scammers now using sophisticated tactics to trick investors into making decisions that can lead to devastating losses.

If you’re an investor – whether you’re investing in stocks, bonds, or other financial instruments – you need to know how to protect yourself.

Let’s break down the signs of securities fraud, the most common scams, and what to do if you suspect you’ve been targeted.

What is Securities Fraud?

Securities fraud usually happens when people or companies deceive investors for their own financial gain. This involves giving false information, insider trading, Ponzi schemes, pump and dump schemes, and misrepresenting a company’s financial reports.

Essentially, securities fraud is any act that manipulates the market or misleads investors into making bad financial decisions.

Regulatory bodies like the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are working primarily against securities fraud. But some scams still slip through the cracks and escape the eyes of these regulatory bodies.

This means that you, as an investor, need to be careful and aware of how this type of fraud happens, too.

Signs You Might Be Dealing with Securities Fraud

Securities fraud isn’t always easy to detect, but there are some warning signs that you should never ignore.

Guaranteed High Returns with No Risk

If someone promises an investment with “zero risk” or “guaranteed high returns,” that’s an immediate red flag. 

All investments carry some level of risk, and no one can guarantee profits to anyone. If someone says otherwise, don’t engage and consult a securities fraud lawyer instead.

Pressure to Act Immediately

Fraudsters often create a sense of urgency, insisting that you invest right away or you’ll miss out on a “once in a lifetime” opportunity. 

Every investment decision should be made with careful research, which takes time. If someone is pushing you to skip this part and hurry up, just don’t work with them.

Unlicensed Brokers or Firms

Before investing, always check if the broker or firm is registered with the SEC or FINRA. Unlicensed firms and brokers usually engage in fraudulent schemes and disappear once they’ve secured your money.

Unclear or Overcomplicated Investment Strategies

Scammers like to use complex jargon and vague descriptions to make investments sound exclusive or sophisticated. 

If you can’t clearly understand how your money will generate returns, walk away and don’t look back.

Unsolicited Investment Offers

If you receive a random phone call, email, or message from someone pitching an investment opportunity, be wary. Cold calls and spammy investment promotions are often linked to fraud.

Common Types of Securities Fraud

There are many ways you can fall victim to securities fraud, but here are some common ways it happens:

Ponzi Schemes

These scams promise high returns to early investors, but instead of generating profits through legitimate investments, they use new investors’ money to pay previous ones.

Fraudsters might deceive investors by making them believe their returns are given from profit, but these schemes collapse when they stop receiving new investments.

Pump and Dump Scams

Fraudsters will hype up a low-value stock, causing its price to rise rapidly. Once enough investors buy in, they sell their shares, causing the stock’s value to plummet.

This leaves other investors with worthless shares.

Insider Trading

This is when someone trades stocks based on confidential information that hasn’t been made public. 

While insider trading isn’t always a scam that targets investors, it is still illegal and can manipulate stock prices unfairly.

Affinity Fraud

This scam targets specific communities like religious groups, ethnic minorities, or social clubs. They use a trusted insider to promote fraudulent investments.

Victims of affinity fraud are more likely to trust the scammer because of their shared background.

Advance Fee Scams

You might be asked to pay an upfront fee for access to a profitable investment. Once you pay the fee, the scammers vanish, and the promised opportunity never comes.

How to Protect Yourself from Securities Fraud

While scams are becoming more sophisticated, there are many ways you can still safeguard your investments.

Research Before Investing

Check if an investment opportunity is legitimate by verifying the company, its financial statements, and its leadership.

Look into online reviews and make sure they are registered with the SEC or FINRA.

Be Skeptical of High Returns

If it sounds too good to be true, it probably is.

Compare the promised returns with the industry averages. If there are unrealistically high returns, it’s probably a scam.

Verify Brokers and Advisors

Always confirm that a broker or financial advisor is licensed.

You can check their credentials through the SEC’s Investment Advisor Public Disclosure database or FINRA’s BrokerCheck.

Never Share Personal or Financial Information

Be careful about sharing sensitive information over phone calls or emails, especially when there’s an unsolicited investment offer.

Identity theft and fraud go hand in hand.

Keep Track of Your Investments

Review your account statements and trading activity regularly. If anything seems off, like if you see unauthorized transactions or missing funds, report it immediately.

Consult a Lawyer

If you suspect fraud, seeking legal advice is the best move. A lawyer specialized in securities fraud can help you understand your rights, recover your losses, and take legal action against fraudsters.

What to Do If You’ve Been a Victim of Securities Fraud

If you suspect that you’ve been scammed, act quickly to improve your chances of recovering your losses.

Follow these steps.

Report the Fraud

File a complaint with the SEC, FINRA, or the Consumer Financial Protection Bureau. 

If the fraud involves a brokerage firm, notify the firm’s compliance department as well.

Gather Evidence

Document all communication, account statements, and transactions related to the fraudulent investment. This information will be crucial if you pursue legal action.

Contact a Lawyer

An experienced lawyer can guide you through the process of recovering your funds and potentially holding the fraudsters accountable.

Warn Others

Sharing your experience can help prevent others from falling victim to the same scam.

Consider posting warnings online or within your investment community.

Securities fraud is a growing problem, but with the right knowledge, you can protect yourself and your investments. 

Stay skeptical, do your research, and never rush into an investment without fully understanding it.