Despite these rules, both the corporate officials who release information about their companies and the stockbrokers who help people invest in securities may knowingly lie to or hide information from consumers in order to raise the stock level of a company for their own profit. Corporations may commit this type of fraud by releasing false information to the financial markets through news releases, quarterly and annual reports, SEC filings, market analyst conference calls, proxy statements, and prospectuses. Brokers may commit this type of fraud by failure to follow clients' instructions when directed, misrepresentation or omission of information, unsuitable recommendations or investments, unauthorized trades, and excessive trading (churning). Since brokerage analysts' recommendations to clients may affect the fees earned by the firms' investment banking operations, it may be profitable for the analysts to play up the value of certain stocks.
The Stanford Law School Securities Class Action Clearinghouse, in cooperation with Cornerstone Research, tracks the number of securities class action filings. In 2002 the number filed was 225, an increase of over 200 percent from the 1996 number of 108. Of these 225 filings, 113 were against firms traded on the New York Stock Exchange and 85 were against companies traded on NASDAQ. There were 53 filings in New York, 43 in California, and 22 in Delaware. Companies in the communications industry were most often filed against (58), followed by those in the noncyclical consumer industry (47) and finance (33). The most common allegations made were misrepresentation in financial documents and false forward-looking statements.
In addition to the traditional securities class action filings, two new types of securities class filings have been introduced. "IPO Allocation" filings allege misconduct in the allocation of Initial Public Offering (IPO) stock, that is, stock for companies going public for the first time. In 2001 there were 312 IPO Allocation filings recorded. In 2002 "Analyst" filings were introduced. These filings allege that investment banks or individual securities analysts at such banks issued biased research reports or ratings on companies. These reports were not based on factual information and did not disclose conflicts of interest. Numbers for Analyst filings have not yet been tracked by the Clearinghouse.
In May 2002 the stock brokerage company Merrill Lynch agreed to settle a case brought against it by the New York Attorney General Eliot Spitzer, for allegedly hyping certain stocks publicly in order to gain banking business while privately criticizing the stocks to others. The settlement amount agreed to by Merrill Lynch was $100 million. In addition to the monetary sum, Merrill Lynch must now include a warning on its stock recommendations to advise investors that it may be doing business with the companies whose stock it is rating.
Oil and Gas Investment Frauds
While many oil and gas investments are legitimate, this area is well-known for fraudulent offers. Oil- and gas-well deals are sometimes offered by "boiler rooms," or fly-by-night operations that consist of nothing more than bare office space and a dozen or so desks and telephones. Boiler room operators employ telephone solicitors trained to use high-pressure sales tactics. These con artists make repeated unsolicited telephone calls in which they follow a carefully scripted sales pitch that guarantees high profits. Some swindlers surround themselves with the trappings of legitimacy, including professionally designed color brochures.
In a fraudulent oil and gas scheme, scam artists promoting the investment often offer limited partnership interests to prospective investors who live outside the state where the well is located and outside the state the scam artists are calling from. This distance reduces chances for an investor to visit the site of a well or what may be nonexistent company headquarters.
Individuals subjected to a high-pressure sales pitch in an unsolicited telephone call should watch for the following tip-offs that they may be dealing with a swindler:
- The oil well investment "can't miss."
- Very little risk is involved.
- The promoter has hit oil or gas on every other well previously drilled.
- A lot of oil or gas has been found in an adjacent field.
- A large reputable oil company is already operating near the company's leased property, or planning to do so.
- A decision must be made immediately to invest in order to assure the purchase of one of the few interests remaining unsold.
- The deal is only available to a few lucky and specially chosen investors.
- The salesperson has personally invested in the venture himself.
- A tip from a reputable geologist has given the company a unique opportunity to make this venture a success.
One can reduce the risk of being swindled by being suspicious of any deal that promises a fantastic return at little risk.
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