It is extremely important for investors to remain updated about the latest happenings in financial markets. Keeping track of emerging developments ultimately empowers smarter investment decision-making.
At the same time, it is vital to acquire knowledge about past instances of fraud in order to learn from them. It is worth noting that stock scams are among the most common frauds conducted in financial markets.
Therefore, investors must keep a tab on these scams and ensure that they do not fall prey. Keep reading to take a closer look at the most prominent stock scams in history.
One of the most prominent stock scams of all time involved energy trading company Enron. This company was once counted among the top energy sector brands in the US. It became fairly popular among investors in the late 1990s and the early 2000s. The company’s stock was being traded at over $90 per share.
However, during the year 2001, it was discovered that Enron was using shell companies and illegal accounting practices in order to hide large amounts of debt. This resulted in a sharp decline in the share prices, as they bottomed out to under $1. This was a major scam that led to massive wealth erosion for investors.
Another case that involved an accounting scandal involved telecommunication company WorldCom. The company recorded profits of $1.3 billion during the year 2001. It was one of the most well-known brands in the telecom industry. The company’s price per share stood at $60. However, during the year 2002, it was revealed that WorldCom was reporting its operating expenses in the form of investments.
This act of account manipulation led to a sharp fall in the share prices. After the scandal came under the public spotlight, WorldCom’s share price fell to $0.20. This case not only rocked the company’s investors but also resulted in massive job losses.
During the late 1990s, Qwest Communications was among the largest telecom companies in the US. The company offered a range of services to its customers and was counted among the most recognizable brands within the telecom industry.
In 1999, the CEO of the firm stated that it was targeting double-digit revenue growth over the next few years. However, the telecom market was quickly becoming saturated, making it hard for the company to achieve its targets.
In order to cover up the situation, the company made use of fraudulent accounting and misleading financial instruments. This resulted in a huge decline in the company’s share price, leading to investor losses of around $3 billion.
Bernard Madoff Investment Securities was a company set up by Bernie Madoff. This company executed a complex scam that allowed it to hide its hedge fund losses. The firm adopted a technique that allowed it to raise money from one set of investors to pay off others known as a Ponzi scheme (named after Charles Ponzi).
Even though the company was recording consistent gains over the years, it had only been siphoning off money from one source to pay another. This scam cost investors more than $50 billion.
The above cases indicate that stock market investing isn’t without its risks. However, if investors pay enough attention to financial statements and don’t fall for stories that are too good to be true, they can detect the warning signs. As always, the best strategy is to diversify your portfolio in order to minimize the risks.