Blog
How do economic crimes like securities fraud hurt victims financially?
Contents
How Economic Crimes Like Securities Fraud Financially Hurt Victims
Economic crimes like securities fraud can have devastating financial impacts on victims. When companies or individuals commit fraud, they often try to trick investors out of their money or misrepresent vital information that investors use to make decisions.
One of the most common types of securities fraud is accounting fraud. This involves companies deliberately falsifying or altering their financial statements and books to make their business seem more profitable than it really is. Common techniques include prematurely recognizing revenue, understating expenses, artificially inflating assets, and hiding liabilities off the balance sheet.
When accounting fraud is eventually uncovered, like in the cases of Enron and WorldCom, the company’s stock often plummets in value. Investors who owned shares suffer massive losses almost overnight. For example, at its peak Enron’s shares traded at $90.75, but after its fraud came to light, shares plunged to less than $1 . Shareholders lost nearly all their investment.
Retirement funds invested in companies that commit fraud also take big hits. The average 401(k) plan lost $190,000 from holdings in WorldCom stock when it collapsed . This wiped out years of hard-earned retirement savings for many victims.
In addition to shareholders and investors, employees can suffer financially from corporate fraud. When companies ultimately file for bankruptcy or shut down after revelations of misconduct, workers lose their jobs and income streams. We saw this with Enron – thousands of employees were laid off without severance pay or pensions after it went bankrupt .
Ponzi Schemes
Another type of economic crime that financially devastates victims is Ponzi schemes. This is when an investment operation pays returns to existing investors using money obtained from new investors, rather than actual profits. The scheme leads victims to believe high investment returns are coming from product sales or other means.
Bernie Madoff orchestrated the largest Ponzi scheme in history, with losses estimated at $65 billion . Many victims lost their entire life savings because they thought they were earning consistent high returns. But in reality, Madoff used money from new investors to pay off existing ones and fund his lavish lifestyle.
Ponzi schemes eventually fall apart when the fraudster can no longer attract new investment money to keep the charade going. At that point, the scheme collapses and remaining victims lose everything. Lives are completely ruined through bankruptcies, foreclosures, stress-related illness and even suicide in extreme cases.
Pump and Dump Schemes
Another economic crime that causes financial loss for victims is the pump and dump scheme. This involves artificially inflating the price of a stock through false, misleading statements and aggressive hype. Once unsuspecting investors purchase shares at the “pumped up” price, the perpetrators sell off their holdings for substantial profit.
After the dump, share prices come crashing down. Investors are often left holding worthless or near worthless stock. For example, after prices plunged from $21 to mere pennies per share, many victims lost their entire investment in Neuro-Hitech Inc. due to a pump and dump scheme .
Recovery Efforts
Recovering losses from economic crimes can be an uphill battle for victims. Class action lawsuits are sometimes filed against companies and individuals responsible for the fraud. But even with legal judgments, victims are rarely made whole.
For publicly traded companies that commit fraud, shareholders may recoup pennies on the dollar after assets are sold off during bankruptcy proceedings. And executives responsible rarely pay out of pocket.
With Ponzi schemes, clawback lawsuits allow courts to retrieve money paid out to early investors so it can be redistributed to victims. But most funds are long gone by the time fraud is uncovered. Many victims never get restitution.
Government agencies like the SEC do prosecute securities fraud and impose fines on perpetrators. But money often goes to the government or is used to reimburse investigation costs – not directly compensating victims.
Lasting Impact
Beyond direct financial losses, victims of investment fraud suffer career setbacks, chronic anxiety, depression, and loss of trust that can impact lives for years. Some are so shattered they never fully recover or participate in markets again.
In many cases, life savings built over decades vanish instantly. Retirement plans promising security become distant dreams. Nest eggs for college, home purchases, medical needs and more disappear in a flash.
Instead of realizing plans made possible by years of investing, victims are left destitute. They are forced to postpone retirement, sell homes, and even declare bankruptcy due to fraud. What may seem like harmless “white collar” business crimes on the surface can damage livelihoods for generations. The impacts spread like ripples far beyond direct victims.
In the end, while economic criminals escape with profits and little accountability, countless victims see hopes and financial futures evaporate before their eyes. Trust in markets erodes even for those not directly affected. For these reasons, securities fraud and related schemes continue inflicting financial devastation that profoundly alters lives long after cases fade from the headlines.