Fraud - SEC Investigations - April 2007

By R W Cuthill Jr

During the six months ended March 31, 2007 the SEC announced in Litigation Releases the opening of eighty-one new cases. Almost half of the cases were of three types: accounting fraud, insider trading and stock manipulation.

I defined accounting fraud and insider trading in an article I wrote in 2006, entitled, “FRAUD-WHATS NEW AT THE SEC”. You can access this article at www.ezinearticles.com/?id=327339. I will concentrate on stock manipulation frauds in this article.

In stock manipulation fraudsters make a profit by buying or selling the targeted stock, already knowing which direction its price will go. A simple example of this is called a “pump and dump scheme”. The fraudster “pumps” the price of the stock by encouraging buying or selling in the stock. This is often done by disseminating information on the Internet or by mass faxes. Sometime it is done by actual trading in the stock.

The type of information varies but can be very creative. In one prior case the fraudsters controlled a small US public company and a small UK private company. The two companies entered into a merger agreement for an exchange of $600M of debentures. The fair market value of the net worth of each company had a value of less then $2M each. Of course the headline on the Internet was that it was a six hundred million dollar deal. The stock of the US public company increased from pennies to over $10 in a period of weeks and the fraudsters “dumped”. No one found out how much profit they made and there was no prosecution.

Fraudsters have developed a new way of inflating the price of the stock in pump and dump schemes. By stealing investors' on-line brokerage account information, they can use the investors' accounts to trade the targeted stock. This trading will influence its price in the direction the fraudster wants it to go. They then buy or sell the stock, knowing the the price direction. Sometime they will buy on the way up and then sell short, knowing the price will drop when they stop pumping the price.

Does this mean that these frauds are the ones to be aware of today? Not really. These statistics are a compilation of what cases are being investigated by the SEC during the last six months. During the first nine months of 2006 Ponzi schemes and hedge funds made up 18% of the cases opened, while they only made up 10% in the more recent period. This more then one-third drop in cases involving Ponzi schemes and hedge funds does not mean that these frauds are declining. The cases being investigated by the SEC are influenced by many things including: complaints filed by investors, the needs of the investing public, congress, public opinion, and most importantly, the decisions of the SEC’s staff.

How can an investor use this information? Remember that any investment you make could be a fraud. Before you invest look for the warning signs, such as: securities which are not registered, investment funds (including hedge funds) which are not registered, investments with high returns and little risk, secret trading schemes, offshore investment funds, small-cap stocks touted on the Internet or by faxes, investment advisors who want trading control of your portfolio without the proper oversight, investment advisors who advise you to put all of your portfolio into their can’t-lose investment, and returns which are just too good to be true.

Investing can be profitable, but not if you get caught in a fraud.

Mr. Cuthill's practice is limited to court-appointed positions in large fraud cases. His work has produced the return of millions of dollars of investors' funds. For more information about him go to http://trusteeandexaminerCuthill.com/

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Published at Apr, 25 '07 , Read 1031 times.

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