Coronavirus Losses, Stock Market Decline Expose Fraudulent Schemes

While many investors suffer losses as financial markets fall and investment portfolios decrease during the corona virus crisis, some might experience a disproportionate amount of harm to their brokerage accounts, or other damages that go beyond simple world economic hardship. Some of these losses might even have been preventable if not for the misconduct of a broker who failed to follow securities industry rules, policies, or best practices.

For investors nearing retirement or already retired, excessive losses can prove devastating and when this harm is caused by broker misconduct, the wound can be even harsher and more severe.

Many investors hit particularly hard by COVID-19's financial ramifications, including elderly customers who depend on investment income in retirement, may owe their exacerbated losses to unscrupulous broker malfeasance and fraudulent conduct.

Low Tide Exposes Fraud and Ponzi Schemes

During economic contraction, liquidity generally decreases. As liquidity falls away, it also tends to expose fraudulent schemes and other questionable financial setups that run afoul of securities laws.

For example, if you are an investor with a conservative or low-to-moderate risk-tolerance preference, you generally value protecting principal and minimizing risk, which often correlates with a preference for greater liquidity.

Thinking of the market as the ocean's waves encountering the shore, when markets flourish during high-tide, investors look more closely at gains at the top of the water than at existing principal and other elements below the surface. Liquidity isn't an immediate concern as it remains at a desirable level.  All that which exists beneath the surface remains fairly hidden. After all, everything works well, so why bother examining it closer?

When stocks and markets stumble during low-tide, the markets contract and liquidity decrease.  In turn, this exposes unsuitably risky investment strategies, including fraudulent Ponzi schemes, that previously lurked below the surface and evaded scrutiny.

Similarly, risky strategies and products such as illiquid private placement securities, alternative investments, non-traded real estate investment trusts (REITs) and other barnacles at the bottom of the bay are exposed as the sharp rocks they can be, and the investment ship comes to a turbulent rest along the unsuitably risk-laden ocean floor.

This after-the-fact discovery of nefarious behavior is how many Ponzi schemes and other frauds operate.  It's not necessarily that the market caused the losses, but the rogue representative's illicit behavior is camouflaged during times of success and exposed for the crooked conduct it truly is during times of hardship.

For instance, the $1.2 billion Ponzi scheme of Robert Shapiro's Woodbridge Group of Companies evaded detection during its heyday from 2012-2017, when it looked like a profitable investment.

After all, Shapiro and his national network of brokers and promoters touted Woodbridge, which at the time appeared successful thanks to strong marketing and the Ponzi's systemic sustaining scheme of financing early investors using later investors' monies. In this case, it was Shapiro and others who reaped benefits to purchase luxury items and other personal goods at the expense of Woodbridge investor newcomers.

A financial nightmare, including a bankruptcy filing and multiple complaints against Woodbridge-touting brokers, finally exposed the Woodbridge fraud for what it was, and FINRA/SEC investigators have been working since late 2017 to sanction brokers and others who took part. Visit our "Woodbridge Group" label for a list of brokers thus far sanctioned.

The 2020 market crash driven in part by the uncertainty of the Coronavirus, the decrease in oil prices driven by a spat between Saudi Arabia and Russia, the anticipated losses in the commercial real estate and mortgage lending business will expose fraudulent schemes or other illicit conduct.  Brokers and advisors will try to excuse the losses as "market losses" when in fact all the market did was expose the scheme.