Types of Investment Fraud


Various types of investment and forex fraud have seen a growth in occurrence recently. In part, this growth in financial crime may be due to harder economic times. It may also be facilitated by the growing opportunities for scammers presented by the widespread use of the Internet by the general public and the recent popularity of online forex trading.

Nevertheless, some of these investment frauds are more commonly committed by corporate officers, accountants or by high-pressure sales staff offering easy-to-manipulate stocks over the telephone. Some of the more common investment fraud types are described further below.

  • Corporate Fraud – Fraud committed by high ranking corporate officers, like those at Refco and Enron, can cost investors dearly by overvaluing the price of a stock.

  • Accounting Fraud – A number of major accounting firms have been charged with or admitted being negligent in preventing and identifying falsified financial reports published by corporate clients. These reports can mislead investors as to their client’s financial status and the value of their stock as an investment.

  • Insider Trading – When a corporation’s stock is traded by one of its officers or key employees, or even by large shareholders or relatives, who does so based on secret information that they came across while performing their job for the corporation, this can constitute illegal insider trading.

  • Microcap Fraud – Microcap stocks are those of smaller companies that have a market capitalization of less than $250 million. Since they often trade at low prices, they usually fall into the penny stock category and have values less than $5 per share. Also, because they do not trade publically on major exchanges, their stock price can be readily manipulated. This type of fraud occurs when microcap stocks are sold to the public fraudulently, often as part of a pump and dump scheme that might involve an Internet scam or boiler room.

  • Boiler Rooms – When stock brokerages place excessive pressure on clients to trade over the telephone, they are sometimes known as boiler rooms or houses. Often they are used in conjunction with the perpetration of microcap frauds that may involve the sale of non-existent, distressed or unfairly marked-up stock.

  • Pump and Dump – This type of investment fraud typically involves thinly-traded microcap stocks and entails making false and misleadingly positive statements in order to unnaturally inflate the price of a stock owned by the maker of such statements. Once the stock price rises as fraudulently-swayed investors buy the stock, the fraudster then dumps their over-valued shares. This subsequently causes the stock’s price to fall and investors to lose out.

  • Abusive Naked Short Selling – The fraudulent practice of abusive naked short selling involves selling stock without it actually being borrowed and without having any intent to borrow the stock.

  • Short and Distort – Sometimes individuals spread false or misleading information about corporations in order to cause a decline in their stock prices so they can be purchased or repurchased cheaply. This investment fraud is often called “short and distort.”

  • Ponzi Schemes – Ponzi schemes generally involve fraudulent investment or forex funds, some of which consist of High Yield Investment Plans or HYIPs. In general, these frauds finance withdrawals and payouts with funds from subsequent investors instead of with profits gained from their claimed investments.

Types of Investment Fraud

One Response

  1. Welcome to the blog Cesar.

    Glad to have you aboard

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