Home Business Insights & Advice Securities fraud: Why investors may be misled

Securities fraud: Why investors may be misled

by John Saunders
29th Dec 20 10:19 am

Stock investors spend a significant amount of their time poring over the financial reports of various companies. Still, there have been continued reports of fraudulent activities such as the Ponzi scheme, which misled more than 8,000 investors.

A major factor of these incidents is misleading financial information that was provided by a company. Other enterprises may leave out some essential information knowingly if it negatively impacts investors. Some investors also emphasize only the last details in the management report, which is mostly positive. Continue reading to gain more insights.

Misleading financial advice

In most cases, investors have full trust in their financial advisers. Whenever they intend to invest in a particular company, they must consult them. They believe financial professionals have the information they need to help them make an informed decision. Unfortunately, some experts negligently or purposely leave out some material facts about an investment. Consequently, it prevents investors from making fully informed investment decisions.

The investor ends up losing their money since they did not have the right information. In this case, they can have a legal claim for the broker’s misconduct and get compensation for fraud. Other instances when an investor can have a claim of misrepresentation against an adviser include:

  • When money is lost in investment due to a broker’s omission
  • When a financial adviser misrepresents details regarding an investment
  • When a broker doesn’t disclose a conflict of interest about an investment

Misleading stock market results

If you listen to the stock market results of some companies, they always report positive outcomes. However, when those positive results are misrepresented, investors are deceived into believing that such businesses are still doing well.

It gets worse when financial analysts cooperate with them instead of fighting this vice. Under their watch, the rosy numbers are used to mislead potential investors. In reality, some enterprises that seem to be profitable are making huge losses. The analysts who are supposed to call them out are also not making enough effort as expected.

A CNBC report showed that many companies have false results to show a positive outcome in their favor. About 72% of companies had tilted profits that exceeded net income for the first quarter. Still, quarter after quarter, this seems to be a frequent trend. In such cases, the Securities and Exchange Commission should provide oversight to avoid false information in securities exchanges.

Presentation sequence of financial information

Listed companies ensure that they report their earnings for the previous year and also state their plans. Every documented detail is important to any investor, and it may be the difference between a profit or loss in an investment.

However, the presentation order of financial details easily misleads a majority of investors. They don’t take their time to read through the entire document due to the human mind’s limited attention span. Instead, they judge a company’s performance through the information given in the latter sequence.

Although financial information is neutral, value-free, and objective, the order of information influences non-professional investors. Companies can take advantage of this to hide negative details in the mid-section of a report and give positive details towards the end.

Graphs are also used in various reports, and they quickly grab the attention of investors. They can retain them in their memories compared to other documentations. As a result, companies use more graphs to highlight favorable financial performance.

Conclusion

As an investor, you need to be cautious about misleading information, as explained above, which can lead to huge losses. You can always seek compensation for fraud against a company or broker who presents false details. General Electric is one such company that had to pay a penalty of $200 million for giving misleading information to investors.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.

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