Securities Fraud: What You Don't Know Can Hurt You

New York, NYYour state of mind right now might have a lot to do with how much money you have lost to securities fraud. If you had a lot of money invested with Bernard Madoff, which you then lost to his Ponzi scheme, you are likely feeling a bit nervous. Stock fraud is not as rare an issue as people would like to think—recent news has made that much clear. The good news is that you can turn to securities arbitration to recover your money. The bad news is that you had to go through this at all.

It seems almost like an economic perfect storm. Not only are the big banks requesting massive bailouts, but jobs are being lost, homes are being foreclosed on and the largest Ponzi scheme in US history has been uncovered (not to mention a few other, smaller Ponzi schemes). Bernard Madoff faces charges and now his accountant has also been charged for his role in the fraud.

But charges against those involved do not necessarily get people their money back. It also does not help them get their trust back, because in truth investors not only trusted Bernard Madoff with their money, they also trusted the Securities and Exchange Commission to investigate and uncover Ponzi schemes before they get too large. Unfortunately, in this case both Madoff and the SEC have let investors down.

The problem, of course, is that most investors rely on word of mouth and references from friends when they choose where to invest their money. It makes sense—if they know someone who has had good returns, they believe those returns are legitimate and the investment is sound. They assume that somewhere down the line, someone has done their due diligence and found the investment to be safe and secure.

They do not read all the writing on the prospectus, and while it sounds ridiculous that they would not read the whole thing, given how much money they are investing, can they really be blamed? Who among us actually reads every single line of a contract (including that daunting the fine print), especially when close friends are saying that the contract is good?

Of course hindsight is everything, but given the good Madoff name, the references of friends and family and the SEC's lack of warning on Madoff, one can forgive investors for not quite checking everything out as thoroughly as they probably should have. The problem is that in this case, they got caught.

The other problem for investors, not just investors with Madoff, is that this situation highlights that the SEC really does not catch every scheme and fraud as quickly as it should. In fact, the SEC does not even always act on tips about fraudulent investments—even if the evidence is overwhelming that they should. According to an editorial in the Los Angeles Times, despite the pleadings of a Boston money manager to simply do the math on Madoff's claims, an action that probably would have uncovered the fraud, the SEC not only did not investigate Madoff, it even accepted his lies. Furthermore, the same money manager suggested that executives at financial institutions, including Morgan Stanley, warned clients not to invest with Madoff but did not warn the SEC about their suspicions about him.

So, some people may have known about Madoff's activity, but the regulators did not do anything about it, leaving investors out on their own.

And that is the crux of the matter: when it comes to securities, what you don't know really can hurt you, which is why it is vital that you thoroughly investigate everything. You cannot just rely on the words of people you trust—you have to do the in-depth investigation, read the prospectus thoroughly and be prepared to ask the tough questions. And, if something goes horribly wrong as it did in the case of Madoff, you can file a lawsuit to try to recover your money.