What is an Investment Fraud?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 02 February 2020
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Investment fraud is an activity where people are misled with the use of false information into making investment decisions. Governments monitor investment activities and related practices carefully to identify signs of fraud and prosecute them. People can engage in fraud at a variety of levels and the penalties may include fines, prison time, and suspension of trading licenses.

Often, investment fraud involves nontraditional investments, where fewer consumer protections are in place and people may not be aware of the risks. Consumers may be enticed with claims of big returns, while the person committing the fraud pockets their money. This can be seen with activities like schemes promising fortunes from real estate development or investing in a company at the start to access large returns in the future. A Ponzi scheme is another type of investment fraud.

Companies can defraud their customers by providing incorrect information about profits and the company's overall financial health. This may lead people to make bad investment decisions because they aren't aware of the true financial situation. Insider trading, where people act on proprietary information, is also a form of fraud, because members of the public don't have have access to the same material.


Brokers and agents can commit securities fraud by doing things like misrepresenting investments and failing to disclose conflicts of interest. Individual investors on the trading floor may engage in a variety of activities considered fraudulent in the hopes of profiting before people identify the fraud. At individual securities exchanges, the rules for transactions may vary, and personnel oversee the floor to look for signs of investment fraud, such as not filling out trading cards, making false trades, or attempting to manipulate the market.

Some signs an investment may not be legitimate can include very high sales pressure, suggestions to act immediately or lose out, or dismissals of request for more information to review. While nontraditional investments can be entirely legitimate and legal, the people behind them usually provide substantial information to make sure their prospective investors are aware of the risks as well as the benefits. For people working with brokers and financial advisers, it should be easy to access information about investments, and the broker should always be willing to provide more details so people can make an informed decision.

Many nations have a government agency to oversee investment activities. People who suspect investment fraud may be occurring can contact this agency to report it, providing as much detail as possible to assist the government with an investigation.


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