Time to worry about fraud

Securities fraud levels rise in periods of economic downturns so there are reasons to be concerned about improper dealings during the COVID-19 pandemic, says Douglas Cumming, Ph.D., a professor of finance at Florida Atlantic University’s College of Business.

FAU Professor Douglas Cumming

Company executives facing financial uncertainty and risk of failure have pronounced incentives to engage in misconduct to ride out the crisis. When businesses are failing, management may delay the disclosure of bad news to the public to secure additional funding, retain and attract customers and maintain stable supplier relationships.

“In some cases, managers and investors may not have a full understanding of their disclosure obligations that arise during a crisis,” Cumming said. “The pandemic brings new requirements for financial reporting about material risks, and without proper guidance and prudence, firms are more likely to fall short of their obligations under the law.”

Investors also have reason to engage in improper conduct with respect to insider trading, which involves illegally acting on non-public information. It’s a common crime to sell stock before the extent of bad news is publicly known, and there are huge incentives created by large market swings in a financial crisis. U.S. Sen Richard Burr recently resigned as chairman of the Senate Intelligence Committee after authorities launched an investigation into accusations he sold as much as $1.6 million in stock before the coronavirus-related market meltdown in March.

The U.S. Securities & Exchange Commission has warned investors of illegal practices such as pump-and-dump schemes, in which traders use false information to inflate stock prices before selling the shares at a profit. These types of market manipulation practices exist in a variety of contexts, such as mergers and acquisitions, as discovered by Cumming and explained in this video.

What’s more, periods of financial crisis make it much harder to disguise past misconduct, he said. During the financial crisis of 2008-09, it was impossible for Bernie Madoff to conceal his Ponzi scheme because of investors’ concurrent demand for withdrawing funds that did not exist.

But Cumming points out there are ways for investors to protect themselves. His research discusses the importance of investor due diligence. In the case of crowdfunding, for example, Cumming explains that due diligence can be facilitated through social networks and text analysis. Fraudsters tend to stay away from social media and have poorly worded disclosure documents.

“Social media is a great tool for facilitating trust and enabling better due diligence,” he said.

Cumming added that detection has improved over time with computerized enforcement, but there still are challenges tracking fraud in international markets.

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Drew Limsky

Drew Limsky



Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.