When Corporations Commit Investment Fraud
Although the investment fraudsters who make headlines tend to be individuals, corporations can also be guilty of major fraud schemes. The source of corporate investment fraud is often a deliberate lack of transparency that leads investors to suffer losses or unknowingly act against their own best interests.
On March 15th, 2016, AIG was fined $9.5 million for allegedly misleading mutual fund investors during the sale of its brokerage business.
The SEC accused AIG of recommending high-fee investments to clients without following proper disclosure procedures. Brokers are required to disclose certain information to investors, such as whether particular investments will benefit the brokerage firm itself.
The high-fee investments AIG recommended would have increased the value of the brokerage business, but the company allegedly failed to disclose the potential conflict-of-interest. AIG was also accused of failing to properly monitor its mutual fund clients’ trading accounts, and in doing so those clients may have paid higher fees than strictly necessary.
AIG has had a fraught history with investment fraud and alleged misconduct, including the activities that led up to its $182 billion government bailout in 2008. Throughout the past decade, other large companies have made similar errors that negatively impacted the investors who had put their trust in corporate financial advisors.
Transparency requirements for financial firms
It may seem obvious that investment advisors should work in their clients’ best interest, but there is actually a great deal of opposition from firms who feel such a requirement would limit their flexibility.
The Department of Labor disagrees, and will soon publish new standards to which investment firms must adhere. The rules will apply to 401(k) advice, which has continued to be a major financial challenge for Americans in the wake of the recession. Now more than ever, people deserve to receive the best possible advice on how to plan for their retirement. Investment firms and advisors would therefore be prohibited from giving advice that poses a conflict-of-interest or benefits the firm before the client.
A conflict-of-interest could look like the AIG lawsuit, where advisors may have steered clients towards investments based not on actual investment needs, but on the needs of the firm. It could also be a lack of transparency about business performance that could potentially impact investor decisions, as was the case in the SEC’s lawsuit against Wells Fargo in March 2016. Wells Fargo and the Rhode Island Economic Development Corporation allegedly failed to warn investors of video game company 38 Studios’ dismal prospects; the company eventually went bankrupt. Although investment advisors and financial firms can’t predict everything, they are absolutely required to report any pertinent information that they do have regarding an investment’s performance.
The DOL expects the new conflict-of-interest rules to save billions of dollars and diminish hidden fees that harm investors. Though opposition to the rules will likely persist, they are an important step in protecting investors and shareholders from corporate-level investment fraud.
How to spot corporate investment fraud
It can be difficult for investors that receive advice from large corporations to know when they are being misled.
Major financial firms have the resources and experience to inspire trust even when it isn’t completely warranted.
To protect yourself against corporate investment fraud, always seek a second opinion before committing to an investment. Especially in regards to your 401(k), don’t be afraid to spend as much time as you need conducting online research about your options.
Lastly, if an investment doesn’t feel right to you—or you’re just not comfortable with it, the financial firm you hire should trust your decision. After all, as the DOL’s new rules reinforce—you are the client, and your investment advisors are there to serve you first and foremost.