Financial crimes have been committed for centuries and have gotten more sophisticated with the advent of the stock and bonds markets started to become more prevalent in the economy. There several types of financial crimes that can be committed and despite all of them involving money, not all of them are same. They encompass several crimes within the investment fraud umbrella, such as embezzlement, stock manipulation, insider trading and securities fraud.
Embezzlement encompasses several financial crimes that can be committed by employees of a company or people in trusted positions. Embezzlement happens when a person or company misappropriates the assets that have been entrusted to them. The funds that are embezzlement are used for different reasons than the one they were originally intended to be used for. For example, an accountant can transfer funds from company bank accounts into his own account and then spend the funds on themselves in any way they choose, whether it is cars, restaurants or vacation. Embezzlement can involve amounts as small as $10 or as large as $5 million.
There are many variants of embezzlements, such as falsifying overtime, taking out a loan with the intention never to pay, where employees of a company clock in and clock out for each other which allows them to collect more in overtime. Or an accountant at a company making fake employee accounts and pocketing their pay, while falsifying financial documents to hide the transactions. Embezzling also counts when employees steal any type of inventory from their place of employment. Financial embezzlements are often related to goods such as vehicles, boats, trucks that were purchased on a loan contract and never paid, the goods or products then become embezzled.
Stock manipulation is when individuals or corporations artificially increase or decrease the price of a financial security. They are able to do this by organizing a large group of investors to purchase the stock, significantly increasing demand and as results increasing the price drastically. The sudden increase in stock price attracts the attention of other investors who then also purchase the stock, continuing the trend of purchasing the stock and increasing the price. Once the stock reaches a certain price point, the original investors then sell all of their shares leaving the rest of the investors with devalued shares, this scheme is called the pump-and-dump.
Individuals and corporations deflate the price of a stock in order to buy it at a later date for a lower price. The price deflation of a financial security can happen when investors place many small orders at a price that is lower than what the current price of the asset is. The companies that are impacted most by stock manipulation are companies that small micro-cap stocks, with a market capitalization of less than $100, million, in order to strong sway the stock.
Fraudsters typically target small companies with a market capitalization of less than $100 million because they are easy to sway. Investors can also target larger companies, but it would require more funds and would be in the spotlight easier. What they would do is they would could place many order of 50-200 shares per order at a price of $0.10 per share when the stock is trading at $0.05. Investors would interpret this as a signal that there is something negative happening to the company and may start to sell their own shares and this scheme is called the poop and scoop method.
Insider information is one of the simpler financial crimes that can be committed. It involves trading a stock that is publically listed on the market with information that will never be available to the public or an individual has received information before its intended release to the public, such as low than expected earnings or new product releases. The information that is used to purchase stocks can range wildly, from bad earnings, confidential research that will change an industry or the company will declare bankruptcy in the near future.
An example of insider trading is when an executive at a company reveals important information with a close friend who does not work at the company about a merger his company is going to go through in the near future. The merger is expected to increase the stock price significantly and the friend purchases shares in the company before this information is available to the public.
Securities fraud is an umbrella of different crimes, with different schemes within it, such as Ponzi schemes, wire fraud and pyramid schemes. The person committing the fraud can be a person or a large finance based organization, such a company, bank or brokerage. The fraud happens when a party misrepresents any kind of information that will influence an investor's choice in making an investment and the information being used to sway decisions can be anything, as long as the information had influence, whether it is positive or negative influence.
For example, a stock trader or brokerage starts a rumor and tells other investors and companies that the company, Microsoft (MSFT), is going through significant turmoil in the next few months. Many of these investors start to sell their shares in the company, creating domino effect with more and more investors selling their share based on false information.
The Ponzi scheme dates back to the 1870s when it was first recorded. The scheme is named after Charles Ponzi, after he became infamous due to the significant amount of money he took in. The scheme promises investors a much higher rate of return than normal with little to no risk. The scheme generates profits for early investors from the money that is invested by later individuals. A Ponzi scheme focuses all of their resources towards finding new investors for them to invest so they are able to pay off older investors, perpetuating the higher than average returns
Pyramid schemes are also an example of securities fraud, which work similarly to Ponzi schemes, in that, they rely on new investors and members to fund older investors. The scam is based on an organization that contains several levels, with the lowest level paying money upward. For example, one person recruits 10 people to pay him $1,000. The recruited people then tell the 10 people they recruited to recruit 10 more people. If each person is successful, then they would make $10,000 from their investment, minus the original payment of $1,000, profiting $9,000 from the pyramid scheme.
Wire fraud is when financial fraud involved the use of any kind of telecommunication, such as the internet, phone calls, social media, fax or E-mail. The most known and infamous examples of wire fraud is the Nigerian prince scheme, in which a scammer E-mails individuals and claiming to have vast fortunes locked away in a bank, with the goal being to obtain the victims financial information or to get them to send money to pay off the bank fees required to access the vast fortune.
Some financial crimes such as embezzlement can be quite easy to be proven by the courts, as there is a paper trail of the crime, such as the transfers and missing funds. Other crimes are a little harder to be proven, such as insider information. The reason it is hard for the courts to prove is due to its nature of sharing information between a group of people without using a form of communication that is recordable, such as E-mail, text message or phone conversation and is done in person with both parties wanting to benefit from the insider information.
Examples of Recent Financial Crimes
In March of 2019, PricewaterhouseCoopers (PWC) uncovered securities fraud committed by Steinhoff International, a company specializing in furniture and household goods that is based in South Africa. The company overstated their profits for years, amounting to $7.4 billion in fraud. Steinhoff International originally disclosed the unusual finances to the public in December of 2017 and was not fully understood or caught until March 2019, when PWC conducted a full corporate audit of all of their accounts and balance sheets.
As with many cases of securities fraud, the size of the fraud that was committed by the company is tremendous, but was only orchestrated by a small group of executives that work at Steinhoff International. Due to the fraud, the company's valuation was decreased by $12 billion and shares of the company decreased significantly as well. The main victims of this crime were the shareholders of the company.
The Securities and Exchange Commission (SEC) successfully pursued Francis V. Lorenzo, the former director of an investment bank at a Staten Island Brokerage. He misled investors about the holdings of Waste2Energy when he was trying to sell $15 million worth of debt on behalf of the company when the company has assets that were worth less than $400,000 at the time and was charged with securities fraud.
Although Francis V. Lorenzo was not the main perpetrator in the case, he was still on trial due to his involvement in the fraud in which he helped misrepresent the company's assets to potential investors. The CEO of the company received the more severe penalties due to being the main organizer of the scheme and was directing Francis V. Lorenzo by telling him to mislead investors about the company's value.
In July of 2019, the SEC filed insider trading charges against Martha Patricia Bustos and Donald Blakstad. The case against the two states they Martha Patricia Bustos acquired and provided Donald Blakstad with information that is still not public in order to purchase shares before they increased in value. The SEC estimates the information that was provided to Donald Blakstad had profits of more than $6.2 million
Martha Patricia Bustos gave her partner confidential information for about two years when she was working as a Certified Public Accountant (CPA) at Illuminia (NYSE: ILMN), a company that develops and manufactures integrated systems for genetic variations. She gave him several non-public information pertaining to the company's future revenue and in return, Donald Blakstad have her gifts and vacations. This case of insider trading was not caught by other insider traders that were involved, but by the analysis done by the SEC and specialized programs that are designed to detect suspicious trading activities on stock exchanges.
Although many of the cases that involve insider information, securities fraud and stock manipulation have values in the millions of dollars, there are many cases that are much less, such as the case if Massachusetts Institute of Technology (MIT) research scientist Fei Yan. He was arrested and charged in mid-2017 with insider information. He was able to net about $120,000 from the information which he obtained from his wife, who is a lawyer working in mergers and acquisitions (M&A)
With the advent of the internet, potential investors can easily and reliably have some of the most up to date information regarding all matters of a company, from the recent news to the latest acquisitions. If you are still unsure if the investment you are interested in is fraudulent, it would be best to seek legal advice from a lawyer that specializes in that particular field of investing.
There are also countless websites that are written by lawyers and governments such as the Federal bureau of Investigation (FBI) in the United States, The National Crime Agency (NCA) in the United Kingdom and General Directorate (DGSI) for France. Many of these government security agencies have special departments that specialize in finding financial fraud as well as ways on identifying and reporting suspected cases of fraud.
If you have transferred funds to a fraudulent bank account, the following is urgent.
- Immediately alert your bank the transaction is fraudulent. This is most urgent.
- Report the incident as soon as possible to your local police in the country you reside in. Obtain the Police report or case number
- Report the case to the Police in the region you sent the funds to. Obtain the Police report or case number.
- When required, engage Digitpol or its legal team to act for you and to examine the evidence, prepare a report, investigate the case, and liaise with the Authorities and the Banks.
- If your physically located in the region you transferred the funds to, go directly to a Police station, and bring all the evidence with you.
Digitpol advises victims to watch this video before they report a case. https://www.youtube.com/watch?v=wP71GJpCzAs
Is your business effected by Fraud or an Investment related Cyber Crime?
Digitpol is specialized in Financial embezzlement and fraud investigations, If you report a case to Digitpol we will examine the data that you have provided, if evidence exists and we are in position to assist you, we will start an investigation, the first step is the detail all the evidence into a report so that the fraud is clear following that we will start with the banks, police and all relevant authorities to investigate, recover and find evidence.