It is no coincidence that securities fraud lawsuits increase during economic recessions, but decline when the stock market shows signs of recovery? The S&P Index is up by 13 percent, compared to last year. And securities class action filings are down 16 percent.
Cynics might suggest that economic downturns inspire more frivolous lawuists, as investors desperately try to recover their losses from any available deep pockets. But securities fraud and investment fraud claims typically require an injury for the investor to have a viable claim. Stockbroker misconduct and investment fraud arising from misrepresentations and omissions often do not cause injury until the markets take a turn for the worse.
In other words, a rising market often can obscure investment fraud and stockbroker misconduct. But when the markets decline, the true risks of a security that were omitted or misrepresented often cause substantial investment losses. As the saying goes, when the tied goes out all the shipwrecks are revealed. Accordingly, if history is any lesson, some forms of investment fraud and stockbroker misconduct likely are taking place as this blog is written, but many investors will not learn of the fraud or be damaged by the fraud until the markets enter a downturn.