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What Are the Different Types of Securities Fraud?

What Are the Different Types of Securities Fraud?

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What Are the Different Types of Securities Fraud?

With Wall Street and The Wolf of Wall Street, Hollywood brought us two tales of wanton greed and underhanded deals that capitalized on inside trading. Do the illegal acts of securities fraud as depicted in the two movies represent the business deals that take place on the real Wall Street? The answer is yes, with the Securities Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI) primarily responsible for investigating alleged acts of unlawful securities transactions.

The FBI defines securities fraud as “criminal activity that can include Ponzi schemes, pyramid schemes, broker embezzlement, and high-yield investment fraud.” These are just four types of securities fraud that keep the SEC and FBI constantly on alert for illicit securities transactions. Securities fraud represents a form of a serious white-collar crime in which the fundamental principle involves misleading investors into making decisions they would not typically make.

If you are an investor that lost money because of securities fraud, you deserve the type of legal representation that not only gets back your money, but also makes the party responsible for committing an illegal act pay for the crime. At Morgan & Morgan, our team of securities fraud attorneys represents investors that have suffered financial losses because of fraud, negligence, and/or mismanagement. We work closely with clients such as companies, individuals, and investment funds to recover losses sustained by unlawful trading of securities like stocks, bonds, and mutual funds.

Schedule a free case evaluation today with one of the experienced securities fraud lawyers at Morgan & Morgan to determine the most effective strategy for you to recoup your losses.

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  • What Are the Most Common Types of Securities Fraud?

    In a report released by the FBI, both, individual and financial institutions, commit acts of securities fraud. According to the FBI, some of the most common types of securities fraud include Ponzi schemes, pyramid schemes, advance-fee scams, and market manipulation fraud. However, the FBI also states in the report that there are several more types of securities fraud that take advantage of investors.

    Hedge Fund Negligence

    Hedge funds represent a highly complicated type of investment that provides investors with little or no protection. One of the ways a hedge fund manager deceives investors is by claiming to have credentials the hedge fund manager does not possess. Another illegal activity concerns stealing from investors directly and/or from the funds they manage.

    Misconduct by an Investment Advisor

    According to securities law, investment advisors operate in the role of a fiduciary, which means they must place the financial interests of clients ahead of their own financial interests. Unethical investment advisors violate their fiduciary responsibilities by investing clients’ money into inappropriate securities. When an investment advisor approaches you with an investment plan, securities law requires the advisor to present you with all of the pertinent facts that allow you to make an informed decision.

    Structured Products

    Structured investment products usually sell because of an upside of financial gains, with limited risk. Nonetheless, an unscrupulous investment advisor might leave out the risk when pitching an idea for an investment strategy. The downside risk might include having your money exposed if the stock market experiences a significant correction. If an investment advisor has promoted an investment that supposedly had little risk, but instead it came with substantial risk, you might have a strong enough case to file a claim.

    Insider Trading

    In Wall Street, insider trading caused the professional demise of the movie’s lead protagonist, Gordon Gekko. Insider trading represents an illegal act committed by a licensed trader that is based on taking advantage of certain financial information of which the general public has no knowledge. For example, a licensed trader might have the inside scoop on a merger that will increase the stock price of both companies involved in the deal. The trader consummates a trade for personal profit, while the trader’s clients either do not enjoy the same windfall or they lose money.

  • What Are the Most Common Types of Broker Misconduct?

    Most brokers conduct business by following the common rules of ethics. However, unethical brokers mislead investors for personal financial gains by implementing illegal acts like margin trading and making inappropriate investments. One of the most common types of securities fraud involving unethical brokers is a technique called churning, which happens when a stockbroker trades frequently for the sole purpose of earning trading commissions.

    Here are the other types of securities fraud committed because of broker misconduct.

    Failure to Diversify

    Also referred to as over-concentration, failure to diversify can leave an investor exposed to wild swings in the price of one or more types of securities. Diversification is one of, if not the most important criterion for making sound investments. The emphasis on securities diversity is the primary reason why mutual funds started to be a viable investment strategy back in 1924. If a broker has exposed your investment account to the over-concentration of securities, you might recover your losses by filing a civil lawsuit against the broker.

    Unauthorized Trading

    In a vast majority of cases, a broker must receive permission from a client before buying or selling a security. If a broker failed to notify you and gain approval for a securities transaction, the broker might have committed an act of securities fraud. Unauthorized trading represents one of the most common types of securities fraud because of the quick action brokers must take to finalize some types of securities deals.

    Securities Switch

    A securities switch is nearly the same act as churning. The difference is an unethical broker suggests that a client sell a group of securities and then purchase the same securities as a new transaction. Brokers that commit this act of security fraud generate commissions they would not ordinarily have generated. A broker that recommends this strategy to you should be investigated for securities fraud.

    Margin Claims

    Our team of securities fraud attorneys investigates cases that involve brokers recommending that clients borrow on margin to obtain the liquidity to purchase a group of securities. After borrowing to finance an investment, a broker that immediately sells the same group of securities to pay off the margin balance has committed an especially egregious act of securities fraud.

  • What Is FINRA Arbitration?

    The Financial Industry Regulatory Authority (FINRA) represents a non-government and nonprofit organization that protects investors from the illegal acts that are committed by unethical brokers. FINRA receives its legal power from the United States Congress to help resolve disputes and hold unlawful brokers accountable for committing acts of financial negligence.

    One of the most important services a securities fraud lawyer from Morgan & Morgan provides is to support you during the FINRA arbitration process.

    File a Claim

    The first step in the FINRA arbitration process is to file a Statement of Claim, which represents a legal document that includes the details surrounding a securities dispute. Your legal counsel describes the parties involved and the type of financial relief requested. As the claimant during FINRA arbitration, you have the right to seek monetary damages, as well as the amount you should have generated in interest and the amount of money that you lost because of unlawful investment behavior. You must file a Submission Agreement that requires the payment of filing fees.

    Answer to Your Claim

    After your lawyer fulfills every filing requirement, the FINRA arbitration board serves a Statement of Claim to the other parties. Each respondent has a maximum of 45 days to submit an answer to your claim, which includes the presentation of facts and the defense the other parties plan to use.

    Selection of the Arbitrator

    A FINRA computer-generated algorithm produces a list of arbitrators that each party reviews. Each party has a certain number of objections for reasons such as personal bias and conflict of interest. If a party rejects an arbitrator for a valid reason, the FINRA computer algorithm produces another candidate to hear your claim. After the selection of arbitrators, the next step in the process is to attend prehearing conferences.

    Prehearing Conferences

    During the first prehearing conference, each party and the chosen arbitrators meet to determine the arbitration schedule for your claim. This involves setting dates for reviewing evidence, as well as establishing motion, briefing, and discovery deadlines. Your securities fraud attorney might have to attend several prehearing conferences to resolve all preliminary issues.


    The discovery phase of a FINRA arbitration hearing unfolds in a similar manner that discovery unfolds for a criminal trial. All parties exchange information with each other, which includes evidence and witness statements. FINRA guidelines require all parties to cooperate with each other by not withholding relevant evidence.


    A FINRA arbitration hearing reflects the same procedures followed during a trial. Each party makes an opening statement, followed by the presentation of evidence, documents, witness testimonies, and closing statements. All parties have the right to cross-examine witnesses, as well as call witnesses to provide supporting evidence.


    After the last hearing, the group of arbitrators chosen to hear your claim have 30 business days to issue a decision. The decision must come from a majority of the arbitrators on the hearing panel. You might receive compensation that is written down in detail by the panel of arbitrators. The other parties also might have to have to pay fines and the fees associated with the entire FINRA arbitration process. In some cases, a party that loses a FINRA arbitration hearing can file an appeal.

  • Consult With a Securities Fraud Attorney

    If a broker or investment strategist has defrauded you by committing one or more of the most common types of securities fraud, you have the right to see justice by requesting compensation for your financial losses. Because of the amount of money at stake, you should not settle for an inexperienced lawyer who does not specialize in litigating securities fraud cases.

    At Morgan & Morgan, our team of securities fraud litigators understands the anger and frustration that arises because of the unethical acts committed by a professional who is supposed to look out for your best financial interests. Let us represent you during a FINRA arbitration hearing and if needed, a civil lawsuit filed against a broker or investment advisor who broke the law.

    Schedule a free case evaluation to learn more about the FINRA arbitration process, as well as devise a detailed strategy on how we can help you recover from financial fraud and negligence.

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