One of the most common investment options in the US is in the shares of publicly traded companies. Finance and trading are often complex for beginners, which is further made complex deliberately by some. This also leaves the market ripe for major scams and frauds that are not detected until it is too late.
Recently, the GameStop Corp fiasco made everyone stop and notice when a group of individuals on Reddit purchased a lot of GameStop Corp. The scam caused losses worth billions of dollars to hedge funds.
These scams are the reason why stock market scam recovery agencies came into existence. Once a beginner falls prey to such stock market scams, it gets overwhelming for them and harder to recover their losses. Recovery agencies can make the process easier.
Here are five of the biggest stock market scams that shook the world, which could be lessons as well as an exciting read.
Bernie Madoff Scam
You cannot write about major stock trading scams and not mention the Madoff Ponzi scheme. Among the most influential financial individuals in the US, Bernie Madoff ran an investment management company. This company was later revealed to be a Ponzi scheme, which was worth billions of dollars.
Madoff took money from his clients to invest in stocks and hoarded it in his bank account. His clients were shown highly inflated and fake returns on their investments. Such was the influence of Bernie Madoff in the US that despite multiple people complaining to the SEC for decades, and avoiding detection from participants in the best day trading school courses, his company managed to escape every investigation scot-free.
The scam became public when Madoff himself confessed to his sons in 2008 and was sentenced to a prison sentence to the tune of 150 years. He succumbed to natural causes earlier this year while serving his sentence.
Enron Stock Scam
Enron was one of the largest auditioning firms worldwide and among the biggest energy companies in the United States. However, this scam led to the downfall of the energy supply and trading conglomerate headquartered in Houston, USA.
The downward spiral of the company began when the conglomerate was rapidly incurring debts due to failed projects. At the time, the CEO of Enron Finance Corp, Skilling, and CFO Fastow engaged in fraudulent activities and ghost entities to hide the company’s losses and mark up the share value.
Enron executives with insider knowledge started selling their stock at the market rate to investors, who believed they were getting a lucrative stock blissfully unaware of how Enron was in gutters due to massive debts. When these executives continued selling, the stocks plummeted due to rapid upper management fire sales.
This plummeting of stocks made Fortune Magazine question whether Enron stocks were overpriced in 2001. In the same year, Enron’s losses and other existential issues were made public. In the end, both the CEO and CFO were charged with conspiracy, fraud, and insider trading.
The WorldCom scandal was one of the most jaw-dropping scams that shook the world and Wall Street in 2002. Once one of the world’s largest telecom companies, WorldCom tried to bury nearly $4 billion in accounting fraud. WorldCom’s CEO Bernard Ebbers and CFO Scott Sullivan devised stock market scams to inflate earnings and ensure that the company’s stock price would not fall.
Sullivan did this by reporting billions of dollars in operating expenses and spreading them across hoax property accounts. The company books reported the expenses in smaller amounts over a few years instead of reporting it right away. Through this elaborate scam, WorldCom reported an increase in revenue to the tune of $3 billion and a $1.4 billion profit instead of loss.
In June 2002, WorldCom came clean and confessed to having committed an accounting fraud worth $4 billion and declared bankruptcy. The bankruptcy filing — the biggest in the history of America — led to a legal investigation into the CEO and CFO, who were then convicted on nine and five counts of securities fraud, respectively.
Luckin Coffee Scam
NASDAQ-listed Luckin Coffee was a Chinese company that posed a severe threat to Starbucks once upon a time. The upstart grew at a lightning-fast speed and opened stores faster than its competitor, Starbucks. The company raised its valuation to $12 billion in just eight months after going public in 2019.
And then, in April 2020, the company confessed to having faked its sale to increase valuation, revealing one of the major scams in the history of the US. The company revealed that around $310 million of its revenue in 2019 was fabricated through an elaborate scheme.
The company allegedly sold redeemable vouchers worth tens of millions of cups of coffee to corporates linked to Luckin’s chairman and controlling shareholder, Charles Lu.
Additionally, it was revealed that a group of Luckin employees was also instructed to use individual accounts registered with cell phone numbers to purchase vouchers, and sales worth up to $42 million were faked in this manner.
Once the scam was made public, the Luckin stock plummeted massively, and the company ended up being delisted from the NASDAQ stock exchange in the US. Many investors use chargeback insurance defend fraud to mitigate the risks of similar cons. In December 2020, Luckin Coffee agreed to pay $180 million in fines to settle accounting fraud charges and more recently applied for a Chapter 15 bankruptcy protection in New York.
Jordan Belfort Scam
Jordan Belfort is probably the most popular fraud in this list, thanks to the Leonardo Di-Caprio starrer Wolf of Wall Street based on his life. Jordan Belfort founded Stratton Oakmont, which was involved in many frauds, including pump-and-dump scams that artificially inflate the price of penny stocks.
Belfort and his team pursued individuals with money to invest in highly speculative securities and managed to raise investments of more than $1 billion. The National Association of Securities Dealers (NASD) was consistently on Belfort, and his firm’s tail and Stratton Oakmont was shut down in 1996.
Belfort and his associate Danny Porush were convicted for securities fraud and money laundering, after which Belfort was sentenced to four years in prison. He was ultimately released after serving 22 months in prison.
These are the top stock trading scams that shook the stock market and the world. There have been case studies on these scandals, which provide a great insight into the world of stock trading scams and how they work.