Types of Securities Fraud

  • Ponzi Schemes
  • Pyramid Schemes
  • Energy Investing
  • Real Estate
  • High-Yield Investment Programs

In the United States, the law regarding securities fraud is housed within Title 18 of United States Code § 1348, which is published by the U.S. Government Publishing Office online. The first section of the code concerns individuals who knowingly defraud others in transactions involving commodities and securities. The second section explains false promises in connection with the sale of various commodities or securities.

The rule may sound complex and vague to the average reader, but it’s easily understood by sharing basic examples of fraud. The Federal Bureau of Investigation (FBI) usually handles these investigations. Here are five examples of securities fraud.

1. Ponzi Schemes

According to the U.S. Securities and Exchange Commission (SEC), a Ponzi scheme is a type of investment fraud that uses money from new investors to fund imaginary returns on investments of previous investors. Ponzi schemes tend to boast little if any, actual profits, and they usually fall apart when the scheme reaches a point where there aren’t enough new investors to provide fake investment returns for prior investors. The Bernie Madoff scandal is the largest example of a modern Ponzi scheme.

2. Pyramid Schemes

A pyramid scheme is similar to a Ponzi scheme in that the scam always needs new investors to remain afloat, but the hallmark of a pyramid scheme is that investors don’t need to do any real work to earn huge returns. The perpetrators of pyramid schemes usually sell legitimate products, but there are often no profits and investors end up putting more money into the scam than they ever get out of it.

3. Energy Investing

Scammers perpetrating energy investment scams often lure victims in with stories of untapped oil and gas reserves that simply need initial funding from investors to begin production. Unfortunately, these reserves don’t exist, and the investment dollars end up in the pockets of the scammers rather than in search of fossil fuel deposits. Even if an energy investing scheme is legitimate, the business is quite volatile and uncertain and is not an appropriate investment option for individuals who can’t afford to lose their money on an energy bet.

4. Real Estate

Selling distressed real estate isn’t an uncommon activity, particularly when the economy faces a downturn and an increase in foreclosed properties occurs. In a distressed real estate scam, the perpetrator of the scheme will promise people who buy into it a huge return on their investment. Instead of using the money in real estate; however, the scammer simply keeps the funds for himself. The federal government will usually charge the scammer with mail fraud or wire fraud.

5. High-Yield Investment Programs

In a high-yield investment scam, a fraudster will promise huge returns on investments that might reach 30 or 40 percent, which should be a huge red flag to any potential investor that something isn’t quite right with the scheme. These scams often occur online, and the scammer may promise returns at an incredibly fast rate to lure in victims interested in doubling their money in just a few months.

Fraud in securities often deals with a scammer’s promise to an investor and the scammer’s intent to rip off his or her investors. Whether it occurs in the world of real estate, energy, or other types of investment, this “white collar” crime is punishable at the federal level and may result in jail time or fines. The victims of securities fraud come from virtually all backgrounds and must rely on the courts to recover the money spent on fraudulent investments.