Proving Securities Fraud
Created by FindLaw's team of legal writers and editors | Last reviewed June 20, 2016
As an investor, it is often difficult to determine whether you have been victim of investment or securities fraud. Many instances of securities fraud go undetected. Most investors will not even consider the possibility of misconduct until they are faced with the loss of their investment. Because the market naturally fluctuates, not every loss means you have been the victim of fraud. However, big losses should spark your concern and prompt you to undertake a further investigation. It may be difficult or nearly impossible to detect fraud unless you consult with a professional who knows what types of suspicious activity to look for.
Common Signs of Securities Fraud
Listed below are just a few of the 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 find unidentifiable debits or credits on monthly account statements.
- You see a dramatic drop in value of stock in a short period of time.
- It's an "up" market, but you're losing money.
- The majority of investments recommended by the broker are declining in value.
- Your broker tells you to view market news as entertainment.
- Your broker fails to disclose important information regarding an investment purchase.
- Your broker begins trading in high risk and speculative investments.
- You are paying capital gains taxes, despite the fact that your account value is decreasing.
- Financial results are markedly different from publicly announced expectations.
These warnings signs don't necessarily mean you are a victim of fraud. However, if you experience any of these, it is in your best interest to immediately seek the advice of an attorney with experience handling investment and securities fraud matters.
To prove fraud, a customer must show that the broker or someone else in the industry intentionally or recklessly made a misrepresentation or omission of material fact that the customer justifiably relied upon and then suffered damages as a direct result of his reliance on the misrepresentation or omission of material fact. In plain English that means you lost money because you relied on factual information provided by your broker or another securities industry member that they either knew or should have known was not true.
For some fraud claims an investor must show some reliance or action related to the misrepresentation. When a showing of reliance is required, it can be established by direct or indirect evidence. Direct evidence is something like a statement in a prospectus claiming the existence of a lucrative contract that the issuer does not have. When the investor can show that their investment decision was based on that statement, they have provided direct evidence of reliance.
Investors can also use indirect evidence to prove reliance using a theory called fraud-on-the-market. Courts use the fraud-on-the-market theory when a misrepresentation artificially inflates the price of the stock. Because the misrepresentation affected the stock price, and the investor bought the stock based on the affected price, the investor is assumed to have indirectly relied on the misrepresentation that misled the market as a whole.
In such case, the defendant may try to show that the misrepresentation was not important or did not affect stock prices. The defendant may also attempt to show that the individual investor knew that the statement was false or would have bought the stock even if he or she had known of the falsity of the statement.
Fraud by Ommission
When a fraud by omission is claimed, the investor does not have to prove reliance. For example, if a prospectus omits to put prospective investors on notice that the issuer's patent on its primary product is being contested in court, it would be difficult for the investor to prove that he or she specifically relied on the missing information.
The courts have decided that if the omitted information constitutes material facts that reasonably could be expected to influence an investor's purchase decision, positive proof of reliance is not required. Rather, reliance is presumed to exist. The defendant can overcome this presumption by showing that the investor's purchase decision would not have been affected even if the defendant had disclosed the omitted fact by, for example, proving that the plaintiff did not read the prospectus.
Getting Legal Help
You have rights as an investor. You may be entitled to recover the investment money you lost as a result of broker or company misconduct. If you note any suspicious activity and feel you have been wronged, contact an attorney with experience in securities and investment fraud.
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