FINRA Addresses Financial Fraud

FINRA Addresses Financial Fraud

Securities Lawyer 101 Blog

In September 2013, the Financial Industry Regulatory Authority (“FINRA”), with the help of the National Center for Victims of Crime, compiled and circulated “An Advocate’s Guide to Assisting Victims of Financial Fraud.”  The lengthy paper explains the types of fraud most prevalent today, and offers copious advice to people whose work it is to help victims cope with their losses.

Relying on statistics from 2005, FINRA points out that financial fraud is more common than most people realize.  According to the Federal Trade Commission, nearly 30 million consumers are victimized each year.  Between 12.5 and 15 percent of the population are self-reported victims; that statistic does not include a great many who are too embarrassed to admit to their losses, don’t believe the authorities will do anything, or don’t know where to turn for help.  The Federal Bureau of Investigation’s (“FBI’s”) most recent Financial Crimes Report notes that investigations of securities and commodities fraud have increased by 50 percent since 2008.

Modern fraudsters are skilled and sophisticated, making use of a variety of techniques to influence their targets.  Often they make an effort to learn about the intended victim’s interests and beliefs, which they will then claim to share.  A relationship between perpetrator and victim can easily be forged through a common bond like religion, politics, or even sports.  Once the victim begins to regard the perp as a “friend” who understands him and his situation, he becomes putty in the perhaps’s hands.  This is called “affinity fraud.”

Types of Financial Fraud

FINRA identifies four major types of financial fraud:  identity theft, investment fraud, mortgage and lending fraud, and mass marketing fraud.  For the purposes of this article, investment fraud is the relevant category.

Interestingly, a study conducted by FINRA showed that the profile of investment fraud victims does not fit the usual stereotypes.  They are:

  • predominately male;
  • financially knowledgeable (victims scored higher on financial literacy tests than non-victims);
  • college-educated; and
  • self-reliant when it comes to making decisions.
They also tend to have above-average income, and the older investors among them are willing to engage in financially risky behaviors.  They often fail to check the registration status of professionals or products, are open to new information and don’t hesitate to attend “free meal” investment seminars, and rely on tips from people they know.  Though FINRA did not mention it, many probably also rely on tips from internet contacts.

Common Schemes

FINRA includes advance-fee schemes in its list of investment frauds.  Most people associate them with Nigerian 419 scams, but they can have other applications, as when potential investors as asked to pay a sum up front to be “let in” on a supposedly wonderful opportunity.

More familiar in this context are pump and dump operations, in which fraudsters buy or otherwise obtain stock in a low-priced, thinly traded company.  They then pump the stock on information that is usually exaggerated or entirely false, and then dump their own shares into the run they’ve created.  The stock eventually crashes, but by then the front loader has disappeared with his ill-gotten gains.

Ponzi schemes are also well-known, and have been around for nearly a century.  The perpetrator pitches a supposedly attractive investment—often a fund of some kind—to his prospective victims.  He promises a very high rate of return, or sometimes extravagantly high interest.  When investors buy in, rather than purchasing the investments described, he simply keeps the money for his own use.  Should anyone want out, he will be paid by funds contributed by new investors.  Ponzi schemes tend to do well in good economic times.  People who receive regular statements showing that their investment is purportedly growing by leaps and bounds rarely ask to withdraw it.  But when bad times hit, redemption requests increase, and the Ponzi scheme collapses, leaving most investors with nothing.

The paper goes on to offer tips that can be used by advocates helping people who’ve suffered devastating financial losses.  FINRA emphasizes the importance of assuring those people that what happened isn’t their fault; it’s the fault of the criminals who targeted them.

A lengthy list of resources that can be used by victims and advocates alike is included. The resources include addresses and links to law enforcement, regulatory agencies, and victim support groups.  It can be found here:

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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