Helping Investors Protect Their Rights

Fraud Is Everywhere

On Behalf of | Feb 17, 2022 | Broker Misconduct |

Being a fraudster these days is a good business.  There are more ways now to separate you from your money than ever before.  It seems like every day we have to fend off phishing attacks, scam callers, and people wanting to sell you a “can’t miss investment” that turns out to be a Ponzi-scheme.  We all have to be on guard every minute of every day to ensure that our assets are protected.

People trying to steal money out of your brokerage accounts have become more sophisticated and more inventive.  As a lawyer who represents the victims of the securities industry, I am being contacted about the old-school Ponzi schemes, where representatives of brokerage firms are recommending third-party Ponzi-schemes, or perpetrating their own Ponzi-schemes to their brokerage firm clients.  While the particulars of the Ponzi-schemes may be somewhat different in each case, the basics are always the same – the perpetrators of the Ponzi-scheme take your money, and use it to pay interest or principal to previous investors, as well as use a healthy percentage of it for their own lavish lifestyles.  Some of the money even typically ends up going toward philanthropy, because people who are big philanthropists are often perceived as more trusted members of the community.  Someone who gives so much to charity cannot be a bad person, the thinking goes.  Giving to charity opens doors for these fraudsters.

But brokerage firms have to be on the lookout for such fraud, both supervising their representatives to make sure they are not “selling away” from the firm (recommending investment products that the firm does not know about) and ensuring that due diligence is performed on potential investment recommendations prior to those recommendations being made to firm clients.  Often times firms are lacking in these supervisory obligations, creating potential claims by the investors against the brokerage firms to recover losses.

Brokerage firms are also required to have policies and procedures designed to prevent the hacking of brokerage accounts, identity theft, and the like.  Fraudsters are stealing the funds from investors’ brokerage accounts by pretending to be the investor and having the brokerage firm distribute the money to the fraudster.  Another fraud involves hacking into investors’ brokerage accounts and directing investments to be sold and money sent out of the account, and even a new-fangled pump-and-dump scheme, whereby accounts are hacked, but funds are not sent out of the account, but rather are used to buy thinly traded penny stocks, driving the price of those shares up, and allowing the fraudsters to sell their previously-acquired shares in that same company at a much higher price.

While it can sometimes be difficult for a fraudster to hack into an account and send out money from the account to the fraudster or accomplices of the fraudster, it may be decidedly easier to hack into a brokerage account and purchase such thinly traded shares, driving the penny stock prices up by potentially hundreds of percentage points, and allowing the fraudsters to sell their previously acquired shares to those investors who were hacked.  This is a scheme that firms may not be as prepared to discover in real time, even when the scheme is brought to the brokerage firm’s attention prior to the settlement date of the trades.

This was the case in a recent FINRA arbitration filed by The Law Offices of Jeffrey A. Feldman, where a brokerage account was hacked, and no money ever left the account to go to the fraudster, but was used to buy and pump up the price of a thinly-traded Hong Kong-listed penny stock.  The brokerage firm was required to be on the lookout for such scams pursuant to guidance provided by FINRA.  The firm should have seen numerous red flags, including so much of a foreign-listed penny stock being purchased in this one account.  If other accounts at the same brokerage firm also had such activity going on at the same time, this would have been almost a guarantee of a pump-and-dump scam being perpetrated.

In the old days scammers would surreptitiously advise the public about impending news for such a thinly traded penny stock, causing these unsuspecting investors to buy the stock themselves.  That step is skipped in this new-fangled pump-and-dump scheme, which skips the step of convincing the investors to buy the stock, and merely buying it for them.  The effect is to transfer the investor’s money to the fraudsters without ever taking money or assets out of the account.

Other red flags for this new scheme include a sudden spike in investor demand for, coupled with a rising price in, a thinly traded or low-priced security.  Brokerage firms also have to be on the lookout for customers buying and selling securities with no discernable purpose or circumstances that appear unusual or purchases by a customer of a security that does not correspond to the customer’s investment profile or history of transactions, and there is no apparent reasonable explanation for the change.

A customer who engages in transactions that show a sudden change inconsistent with normal activities of the customer is a big red flag that firms need to investigate immediately.  Unfortunately for investors, brokerage firms are often not complying with their supervisory responsibilities, and not catching this fraud as it is happening, or shortly thereafter.  In other words, brokerage firms are not protecting their clients.  Then, when clients complain and demand their money back, the brokerage firms deny the claims and deny responsibility, knowing that most investors will do nothing about it.

When claims are brought, however, which is generally done in FINRA arbitrations, the odds of recovering your stolen funds is quite good if you retain experienced FINRA counsel, such as the Law Offices of Jeffrey A. Feldman.

If you are the victim of brokerage firm fraud, or know one, and would like to discuss your case with a FINRA attorney, please contact the Law Offices of Jeffrey A. Feldman at or at (415) 391-5555.