Hedge fund fraud is a type of investment fraud that occurs when a hedge fund and/or its employees engage in dishonest or illegal activities that harm their investors. These activities can include:
Making false or misleading statements about investments.
Omitting material information about investments.
Trading on inside information.
Churning, which is excessive trading in a client's account that generates commissions for the hedge fund but does not benefit the client.
Misappropriation of client funds, which is using client funds for the hedge fund's own purposes.
Some of the red flags that may indicate that you are a victim of hedge fund fraud include:
Your hedge fund manager is making unrealistic promises about how much money you can make.
Your hedge fund manager is pressuring you to invest in a particular security that you are not comfortable with.
Your hedge fund manager is not returning your calls or emails.
You are receiving unexpected statements from your hedge fund.
You have unexplained losses in your account.
If you see any of these red flags, it is important to take action immediately. You should contact your hedge fund manager to ask for an explanation, and you should also contact an attorney to discuss your legal options.
The Securities and Exchange Commission (SEC) is the federal agency that regulates the securities industry. The SEC has a number of resources available to help investors protect themselves from fraud, including:
Some of the most common types of hedge fund fraud:
Ponzi schemes: These schemes promise high returns with little or no risk. Investors are often lured in by promises of easy money, but the schemes eventually collapse, leaving investors with nothing.
Pump-and-dump schemes: These schemes involve artificially inflating the price of a security through false or misleading information. Once the price has been inflated, the scammers sell their shares and take the profits, leaving other investors holding the bag.
Front-running: This is a type of insider trading in which the hedge fund manager uses non-public information to trade ahead of their clients.
Misappropriation or theft of client funds: This is a type of fraud in which the hedge fund manager uses client funds for their own personal use.
Churning: This is a type of fraud in which the hedge fund manager makes excessive trades in a client's account in order to generate commissions for themselves.
Hedge fund fraud can be difficult to detect, as hedge funds are often secretive about their operations. However, there are a few things you can do to protect yourself from hedge fund fraud:
Do your research before investing in a hedge fund. Make sure the hedge fund is registered with the SEC and has a good track record.
Ask questions about the hedge fund's investment strategy and fees.
Get everything in writing. Make sure you understand the terms of the investment before you invest.
Be wary of promises of high returns with little or no risk.
If you have any concerns about a hedge fund, contact the SEC or an attorney.
Hedge fund fraud can have a devastating impact on investors, who can lose their life savings or retirement funds. If you believe that you have been the victim of hedge fund fraud, it is important to contact an experienced securities attorney to discuss your legal options.
In 2022, Attorney Ostrosky secured a $1.55 million award for an investor who was victim of hedge fund misrepresentations and omissions.