Investors can get scammed on Wall Street

Field of play

Over the line

The purpose of this post is to sensitize readers to the risk of being cheated, robbed or scammed when investing in companies traded on Wall Street and other exchanges.

Scams and frauds happen quite regularly in the world of investing. Many are high profile and well publicized, and many never make it to the news media.

I don’t want to give the impression that every investment is some sort of scam. My only point is that scams happen and we need to be careful. In Canadian ice hockey terms, the advice is that players should skate with their heads up. Investors should remain vigilant.

Some people think that financial markets are much better regulated today than they were 50 or 75 years ago and that scams are much less likely. Sadly, human venality has not changed. The scammers have simply had to become more creative.

Asset frauds

In January 2022 Elizabeth Holmes was convicted of defrauding investors in connection with her blood testing company, Theranos. The case was well reported at the time and there is no need to explain it in depth here. In Theranos the fraud revolved around false claims about the efficacy of the company’s blood-testing technology. The company once had a market cap of some $9 billion. Investor losses were massive.

Over the years in my law practice I had exposure to many varieties of fraud. They fall into several categories. The Theranos case was about false claims about company assets. There have been many of those. One of my clients lost the better part of his net worth in the Bre-X scandal. In the 1990’s Bre-X, a Canadian mining company, claimed to have made a major gold discovery in Indonesia. It turned out that they had salted the drill test samples. At one point the company had a market cap of some CAD $6 billion. Investors lost billions.

The Bre-X fraud was of the same kind as the Theranos: false claims about assets.

Accounting frauds

I got an early education into financial scams when I first became a lawyer in 1970. Atlantic Acceptance Corporation had recently collapsed causing millions of dollars of losses to investors. It was a finance company specializing in commercial, real estate and auto loans and went down as a result of accounting fraud. It shook the accounting profession in Canada to its core. I was asked by a senior partner at the firm to summarize the 200-page report of a commission of enquiry into the collapse.

Atlantic Acceptance was an example of an accounting fraud. Many financial scandals over the years have involves accounting fraud. One would think that accounting standards had been tightened up over the years. When scammers have the will, they can usually find the way.

The Enron scandal in the 2000’s is a good example of an accounting fraud. The Enron Corporation was an American energy company based in Houston, Texas. Enron used special purpose entities to hide debt off of its balance sheet and accounting fiddles to overstate revenue. Enron claimed to have assets of over $60 billion when it went belly up. It’s often cited as the biggest accounting failure in U.S. history. Again, investors lost big time.

Ponzi frauds

Most everyone had heard about Bernie Madoff. This stock and securities fraud was discovered in late 2008. Madoff’s Wall Street investment company was up to its neck in an elaborate multi-billion-dollar Ponzi scheme. In a Ponzi scheme early investors receive wonderful returns. The money to pay these returns comes from later investors’ capital. Madoff was managing billions of dollars. Investors lost a ton.

I acted for a bank in a Canadian Ponzi scheme in the late 1990s. The fraudster was a back-office employee in a reputable investment firm. He persuaded friends and family to invest with him and enjoy superb and consistent returns. The only problem was that it was a classic Ponzi scheme. An amusing sidelight was that the scammer had a sense of humour. One of his investment funds had the name Consolidated Artists Investment Fund. Get the joke? Con Artist Investment Fund.

Misusing and stealing trust assets and self-dealing

Frauds and scams are not limited to little guys trying to make it big. Pillars of society engage.

Dick Whitney was a longtime fixture in New York Stock Exchange life. He was the principal owner of a brokerage firm that specialized in bond trading. He was an officer of the NYSE for ten years and president of the exchange for five. He was a trustee of the NYSE Gratuity Fund and treasurer of the New York Yacht Club. In all he was a pillar of New York society.  In 1938 he was convicted of fraud in stealing customers’ securities and pledging them as security for his own bank loans. He went to prison. (Diana B. Henriques, Taming the Street 2023) p.287

The modus operandi of dipping into trust funds or otherwise misusing trust funds is as old as time. So long as one person has signing authority over someone else’s assets the risk is there. I have seen cases of sons stealing from their mother’s trust funds and other cringeworthy situations.

The situation often starts with the fraudster making a bad investment and thinking to “borrow” some of the trust funds for a short while. The original intention may truly be to repay when everything gets sorted. Of course, things go from bad to worse and the fraudster gets in deeper and deeper.

Conrad Black, a Canadian and society pillar (he had been knighted in England) was convicted of felony fraud and obstruction of justice 2010 and sentenced to 42 months in prison and a fine of $125,000. He sold a public company he controlled and arranged to receive a fraudulent payment under the table in the guise of a payment to release a non-compete clause. This kind of self-dealing with assets controlled but not exclusively owned by the fraudster is sadly quite common. Investors in the public company were the ones who suffered.

Buying advantages, tolerance and influence

In the 1930’s, before the establishment of the SEC, the Securities and Exchange Commission to oversee the regulation of the world of finance, one practice on Wall Street was that the big investment banks would invite corporate titans, elite bankers, corporate lawyers and powerful political insiders to purchase new issues at prices well below the market’s advanced bids. In many contexts, this amounts to bribery. One example given was the actions of Jack Morgan and George Whitney of J.P. Morgan (Diana B. Henriques, Taming the Street 2023) p.101

I saw an example of this in my law practice. In 1994 Confederation Trust went belly up. It was the financial services arm of Confederation Life, a very old and well-respected insurer. It loaned money to developers who were building condominium multiple unit residential buildings. The developers made new units available to the Confederation Trust loan officers at well below market prices. The loan officers were able to flip the units for an immediate profit and thus realize on the bribe. The total loss to policyholders, bondholders, and creditors was in the range of CAD $2.6 billion.

Breach of fiduciary duties

There is a debate raging about the extent of fiduciary duties owed by investment advisors to their clients. Suffice it to say that the advisor/client relationship is fraught with conflict-of-interest problems. I saw a number of cases of broker/advisors putting clients into financial products that were inappropriate for their clients because they generated higher commissions for the broker/advisor. The investment came to grief.

The broker/advisor/customer rep of a major U.S. based investment broker put almost all of the savings of one client of mine into Philip Services Corp., a Canadian recycler based in Hamilton, Ontario. The company was accused of accounting fraud in its 1997 financial statements and went belly up. The president of Philips’ metals trading division was convicted of fraud and sentenced to a total of 26 years in prison.

Insider trading

The finance industry has always had a problem with insider trading. Market surveillance today is light years ahead of what it was 50 years ago. Even so, cases of insider trading periodically come to light. The ones who suffer are the investors who trade with those with inside information.

Price manipulation is another sin that happens from time to time on Wall Street. Today social media are a favorite disease vector for the manipulators.


This has been a brief overview of fraud affecting investors. There are other types of scams and frauds. Those described above are good selection. The best defense against fraud is to only invest in companies where management is completely honest. Of course, that’s easier said than done. There are various warning signs. Oversized returns are one indicator. Sometimes things are too good to be true. Another defense is one’s intuition. There can be subtle warning signs. Reading the CEO’s message in quarterly reports and in the annual report can sometimes be revealing. All in all, it’s a good idea to skate with your head up.


I have written about two related topics in the Motherlode. Section 29.14 Corporate predatory behavior

and Section 29.15 Frauds and swindles reflect on whether an increase in this

kind of behavior is an indicator that a stock bubble is under way.


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