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The Scope of the Problem

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.

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."(10)

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."(12)

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.

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.

SECURITIES FRAUD

What is a security?

The definition of a security encompasses many things; generally, a security includes stocks, bonds, commodities and other investments.

What is securities fraud?

Securities fraud can be described as deceptive practices in the stock and commodity markets. Generally, securities fraud occurs when investors are enticed to part with their money based on untrue statements. Securities Fraud is illegal.

Examples of securities fraud:

A) Providing false information on a company financial statement.
B) Providing false information on Securities and Exchange Commission (SEC) filings.
C) Lying to the company auditors.
D) Insider trading.
E) Stock manipulation schemes.
F) Broker embezzlements.

Who may be involved in securities fraud?

Securities fraud may be committed by, among others, investors, employees of a brokerage houses, corporate executives or their shareholders, or by other market participants.

What can I do to assist in combating securities fraud?

Securities Fraud destroys our confidence in the securities and investments markets and casts doubt over investments into legitimate companies. Therefore, it is very important to identify and report these crimes.

Securities fraud schemes are very secretive and are carried out behind closed doors.