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How To Protect Yourself: Financial Fraud

November 14, 2017

HBO recently released a movie titled The Wizard of Lies outlining the life of a formerly well respected, stockbroker, investment advisor, and financier Mr. Bernard Madoff.  Mr Madoff was arrested in 2008 after swindling over $64.8 billion dollars from family, church members, friends, and 4800 other investors.  

The state and federal governments work diligently to prevent such losses, but it is your responsibility to educate yourself on common forms of securities fraud and how to protect yourself.  Below we attempt to outline common types of security fraud, and provide various broker related warning signs.

Securities Fraud by the Company Itself   The first type of fraud occurs when a corporation doesn’t fully report financials to its shareholders. This may cause an artificial rise in the value of the company’s stock.  The rise then encourages investors to buy shares of a potentially unhealthy company.

Insider Trading  Insider trading is another type of securities fraud. It occurs when someone with confidential information about a company’s finances uses that information to buy or sell stock before the financials are announced.  This may result in stock prices plummeting, or inflating, prior to public announcement.  An interesting study on such fraudulent activity involves Martha Stewart in the early 2000s.  She underwent an insider trading scandal surrounding her selling of four thousand ImClone shares one day before that firm’s stock price plummeted.  

Third Party Misrepresentation The last type of securities fraud occurs when a third party gives out false information about the stock market or a particular company or industry. For example, an investor buys large shares of an unknown company, and then produces fraudulent financials. These actions attract additional investors which causes an increase in share price.  When the price reaches a peak, the original investor sells their shares causing a major decrease in stock value for the remaining owners.

Protect Yourself

Listed below are a few warning signs for securities or investment fraud:

  • Your broker does not return your phone calls.
  • The transactions on your statements don’t make sense to you.
  • Your account statements include transactions you did not authorize.
  • You don’t recognize debits or credits on monthly statements.
  • You see a dramatic drop in value of stock in a short period of time.
  • The financial market is consistently high, but you’re losing money.
  • The majority of your broker initiated investments are losing in value.
  • Your broker largely minimizes market news.
  • Your broker does not give you important information regarding investment purchases.
  • Your broker begins trading in high risk and questionable investments.
  • You are paying capital gains taxes, even when your account value is decreasing.
  • Your financial results are markedly different from publicly announced results and expectations.  


We recommend becoming actively involved with your broker in most investment decisions.  Insist your monthly statements be generated by a reputable brokerage house.  Be sure to review your financial statements on a monthly basis, and compare your results with the market. If you own stock, make sure you get your information directly from the company itself, rather than from third parties, and then double check that information against the SEC’s database.  Remember, if it’s too good to be true then it probably is.  

If you believe you are a victim of financial fraud, Slaughter Law recommends coming in for a free consultation.