Fraud (10b-5)

Investors often find it difficult to determine whether they have been the victim of a securities fraud. Many securities frauds go undetected, even when an investor has suffered significant losses. Securities fraud, which is also sometimes called stock fraud and/or investment fraud, is a deceptive practice in the securities or commodities markets that lure investors into making investment decisions based upon false and misleading information and ultimately results in financial losses and damages to that investor. Securities fraud involves deceptive sales practices designed to enrich the stockbroker or investment adviser at the investor’s expense. Unfortunately, our experience at Lax & Neville LLP shows that many fraudsters are particularly adept at covering up their fraud with ongoing deception. In recent years, there has been a significant increase in the number of securities fraud claims filed by investors. Many investors are ashamed and do not want to have to admit to being a victim of a fraud. Our firm can help you.

While securities fraud may result in criminal liability for an investment firm, broker or investment adviser, all too often criminal securities prosecutions are either not pursued or may not result in a customer’s recovery of their investment damages. However, implementation of a fraudulent scheme in connection to the sale of securities can be a violation of various state “Blue Sky Laws,” regulatory agency rules, and federal securities laws. Almost every forum in the United States recognizes a statutory private right of action for securities fraud. For example, Rule 10b-5 of the Securities Exchange Act of 1934, also known as the Employment of Manipulative and Deceptive Practices, makes it illegal for a broker or investment adviser to use any measure to defraud an investor, make false statements to an investor, omit relevant and material information to an investor, or conduct securities transactions in a manner that would deceive a customer. Due to the serious nature of securities fraud, some statutes mandate that a court award treble damages or triple the amount of the investor’s losses.

In order to establish a prima facie case for securities or investment fraud an investor must plead the following elements:

  1. The broker or investment adviser made a representation or omission of material fact;
  2. The representation or omission of material fact was untrue;
  3. The broker or investment adviser made the representation or omission with intentional scienter or with reckless disregard for its truth;
  4. The investor was justified in relying on the broker or investment adviser’s representation or omission; and
  5. The broker or investment adviser’s representation or omission was the direct and proximate cause of the investor’s losses.

Securities fraud can be a very complicated and nuanced area of law. For instance, not every false statement is fraudulent. The false representation must be one of material fact that would substantially affect an investor’s decision to purchase or sell a security or investment product. Moreover, the firm or broker may have knowledge that the allegedly fraudulent representation or omission was false. Mere mistake by a broker is insufficient. Courts have recognized that, in certain circumstances, it may be impossible for an investor to state in detail the circumstances constituting the fraud where those circumstances are peculiarly within the knowledge of the investment firm or broker. This is especially true when a fraud is predicated upon omissions of material fact. Similarly, reliance upon the misrepresentation or omission needs to be reasonable. Facts to consider when analyzing this element of fraud are the investor’s age, sophistication and investment experience. Because of the nuances associated with pleading a strong securities or investment fraud claim, it is imperative for a fraud victim to retain experienced securities and investment attorneys, like Lax & Neville LLP attorneys who know both the industry and the ever-evolving case law.

Some common examples of fraud include the following:

Pump and Dump: In a pump-and-dump scheme, typically a fraudster buys shares of very low-priced securities of small, thinly traded companies (sometimes referred to as penny stocks) and then disseminates false information about the company in an effort to build market interest in the security. After spreading false information about the company, investors create buying demand, which increases the price of the security. The fraudster then “dumps” his shares by selling them at a fraudulently pumped up price, resulting in significant profit for the fraudster. After the fraudster sells their shares, the value of the stock drops, leaving many investors with worthless securities.

Ponzi Scheme: A Ponzi scheme uses investment funds from new customers to pay purported profits or returns to existing investors. Perpetrators of a Ponzi scheme can keep losses hidden from clients through the issuance of false account statements or trade confirmations that bolster account performance with the hopes of soliciting new investment funds from customers. Ponzi schemes usually collapse when the fraudster is unable to secure new investment funds or when too many investors seek redemptions of their investments to the same time.

Advance Fee Scheme: In an advanced fee scheme, perpetrators solicit victims to send them relatively small sums of money in the hope of realizing a larger gain. To participate in this particular “investment” opportunity, the fraudster requires that the investor send additional funds to cover the costs of purported taxes and processing fees. After receiving the fees, the fraudsters misappropriate the funds. The promised gains never materialize because there is no underlying investment.

Securities fraud can be devastating to an investor and can result in significant losses and damages to an investor’s portfolio. If you suspect you have been defrauded or your investment adviser is being non-responsive or changing his story to explain why things in your portfolio have changed, call us. An experienced attorney may be able to help victims of investment fraud recover their losses. In both state and federal courts, as well as in FINRA or AAA arbitration, a successful fraud claim may entitle the prevailing party to compensatory damages, treble damages, punitive damages, and attorneys’ fees. The attorneys at Lax & Neville have experience representing hundreds of fraud victims. Contact the firm today if you believe that you are a victim of securities fraud.

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