What Is Subprime Securities Fraud?

With the 2007 subprime crisis in this country, and its subsequent fall out with the entire economy, which we are still feeling the effects of today, we have heard the term “subprime securities fraud” bandied about over and over in the news and elsewhere. If you have some confusion about what this term means, here is a primer for you.

Let me caution you, however, that there are hardly ever any hard and fast definitions when it comes to the law, and discussing securities fraud law is no exception. Therefore, this information is only provided for informational purposes, to help you understand the term as it is used in the press, and not its exact legal definition, or the way it is interpreted and applied in a court of law.

With that disclaimer out of the way, it is most helpful to actually separate out this term, “subprime securities fraud,” into its various parts to help understand what it means. First, the term “subprime” refers to making loans to people who for a variety of reasons may have difficulty paying the loan back on the repayment schedule. Because a lender is taking a bigger risk with this individual that they will not get paid back, as compensation they charge them a higher interest rate.

In the olden days if a bank made a subprime loan it stayed on its own books, and it reaped the rewards if the debtor paid in full, or felt the negative financial consequences if the debtor defaulted. However, once banks began selling these loans to others, often in bundles, all of a sudden subprime investments began to pop up that investors could purchase.

Some of those investors who purchased subprime investments are now claiming that they are the victims of subprime securities fraud. The meaning of the term “securities fraud,” as the term is used in the news, basically means when a broker or brokerage firm either misrepresents material facts, or fails to disclose material facts to the investor regarding the investment, which results in a loss on the investment.

The thing investors are always the most concerned about, and what helps them weigh their decisions about whether to buy and sell, are the risks versus the potential rewards of certain investments. Therefore, it is important that investors be told truthful information (and not have material information withheld) about the risks associated with a particular investment. Therefore, basically what someone means when they allege that they are the victim of subprime securities fraud is that they were not adequately told of the risks of these subprime investments and if they had been told they never would have bought them, or would have sold them sooner, or somehow behaved differently which would have avoided the losses they suffered.

It is not always easy to figure out if you’ve actually been the victim of subprime securities fraud in the legal sense, however. There are lots of nuances and factual distinctions that must be determined, and dates and financial records are very important in determining the strengths and/or weaknesses of your potential case. If you think that you have been the victim of subprime securities fraud you should gather up as much documentation about the investments as possible in your possession, and call an experienced investment fraud attorney for a consultation.