It is possible for experts to successfully arbitrage the foreign exchange market for large returns. Yet trading foreign currencies is a high-risk activity with a heavy loss rate for first-time investors. Extreme skepticism and professional scrutiny should be given to any retail broker who promises their forex trading program will deliver easy or guaranteed profits. If an investment opportunity sounds too good to be true, it may be a form of forex fraud.
Complaints related to forex fraud include misrepresentation, false advertising, solicitation fraud, unlicensed brokerages, regulatory breaches, failure to adequately disclose risk, and churning accounts to artificially inflate transactional fees and commissions. At the ugliest end of the fraud spectrum are forex-based Ponzi schemes and outright theft.
Fraudsters may target elderly or first-time investors, but even sophisticated clients can be caught up in a complex fraud. We have assisted investment advisors, attorneys and experienced forex investors who have been victimized in fraud schemes.
The Foreign Exchange Market
The trillion-dollar foreign exchange market – also known as Forex, FX or currency market – is a decentralized system with major local exchanges in New York, London, Tokyo, Hong Kong and Singapore. Trading occurs in continuous 24-hour cycles every weekday. The North American session closes as the Asian session begins, followed by the European, then back again to the North American.
Traders buy and sell currency pairs: for example, trading Euros for U.S. dollars (EUR/USD). They open a buy position when they anticipate the value of the base currency will increase. If Euros are bought with U.S. dollars, and the exchange rate rises, subsequent sale of the Euros should generate a profit. Most pairs priced to four decimal points and the tiniest possible price move – 0.01% – is known as a “pip” or percentage in point.
Frequently traded currencies generally have a small spread between bid and ask prices, so trades should produce only incremental gains or losses. Yet the impact of market fluctuations can be compounded exponentially in high-margin trading, which increases the risk of a total loss.
Managed Forex Accounts
To reduce the complexity of foreign exchange trading, brokerages offer options for managed forex accounts that remove much of the decision-making from investors and delegate those responsibilities to professional traders.
The professional manager places trades on customer accounts for a fixed fee or a cut of the profits. Investors can also choose to duplicate the buy and sell activity of an established expert, using online trading platforms to automate the "mirroring" process.
Due diligence on account management and brokerage firms is critically important for investors who are considering a major investment in the forex market.
Forex Fraud
Investors who use professional managers to make trades are counting on their trustworthiness, competence and judgment. The complicated technical aspects of forex trading – amid the ceaseless movement of a 24-hour market – make it difficult to constantly and reliably monitor buy/sell activity of a third party.
These same factors make it much easier for an unscrupulous trader to take advantage of the situation by misrepresenting the extent of their profits and losses.
In other examples of forex fraud, traders claim to be making trades on behalf of their clients, while misappropriating the funds for their own personal expenses and enjoyment.
Retail brokerages, professional traders and asset managers may offer a legitimate service of providing professional trading recommendations to independent investors. These ‘signal sellers’ promise to share the secrets of their success – often for a steep fee. Unfortunately, some people who tout their track record in the forex market may be materially misrepresenting the facts. They might offer reams of trading data and personal endorsements, but further examination will reveal these credentials are fictitious and fabricated.
In extreme cases, scam artists who solicit investments as forex managers have no experience or qualifications in trading foreign currencies – and no intention of making trades with the money they receive. Those funds are simply used to line their pockets. These pretenders exploit market conditions and mechanisms where investors, in many ways, must operate on blind trust.
About the Author
John Powers is president of Hudson Intelligence, a private investigation agency specializing in the investigation of investment fraud and financial crimes.
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If you suspect you are a victim of forex fraud, or if you are an attorney representing forex fraud victims, please complete the form below to discuss a potential investigation. You can also speak with an investigator by contacting our offices at 800-580-8755.