Investment Fraud and Abuse

Background

The Financial Fraud Research Center has estimated the total cost of consumer fraud, including investment fraud, to be $50 billion annually. Older people are attractive targets because they often have sizable assets. Even when the investment is not outright fraudulent, investors may be unfairly manipulated or their money seriously mismanaged. The Securities and Exchange Commission (SEC) closed 17,771 complaints and questions from investors in fiscal year 2016. In 2011 the SEC adopted a new tips, complaints, and referrals system to track these interactions with the investment community.

Federal and state governments have the authority to protect investors against fraud and abuse. The Internet gives perpetrators of investment fraud new ways to contact potential victims directly. Moreover, the global nature of the Internet raises jurisdictional issues for enforcing consumer and investor protections. Yet the SEC and state enforcement agencies do not have the resources to respond adequately to Internet fraud.

Investors are required to use arbitration procedures established by the Financial Industry Regulatory Authority (FINRA) to obtain redress, but the system has produced inconsistent benefits for consumers. Studies have found that recovery amounts in FINRA arbitration vary greatly. Studies have looked at different variables, such as the composition of arbitration panels, where the panel hearings were located, and how much was asked in damages. Most have shown inconsistency.

Investment Fraud and Abuse: Policy

Redress for victims

In this policy: FederalState

Victims of investment fraud should have adequate federal and state statutory remedies in order to obtain financial redress.

Statutory or common-law remedies available to defrauded investors in federal or state court should not be limited and should include liability for aiders and abettors.

Criminal penalties

In this policy: Federal

Congress and the states should consider adding criminal penalties to the civil sanctions now imposed on brokers and other financial professionals who commit fraud. Government agencies should perform thorough investigations into investment fraud and abuse cases, pursue enforcement actions, and promulgate regulations and initiate rulemakings that protect consumers against investment scam artists.

Telemarketing

In this policy: FederalState

Telemarketing practices regarding investment opportunities that pressure, mislead, deceive, or defraud consumers should be prohibited and prosecuted.

Enforcement of antifraud regulations and laws

In this policy: FederalState

The Securities and Exchange Commission (SEC) should adopt stronger regulations and increase enforcement activities to eliminate fraudulent, deceptive, or unfair practices with respect to investment sales, accounting methods, disclosures, and market structure.

State enforcement agencies and the SEC should be provided with adequate resources to address securities fraud, including Internet fraud.