Hurricane Harvey Aftermath Leaves Opportunity for Financial Fraud

Tierney Mason
Associate Editor
Loyola University Chicago School of Law, JD 2019

 

On August 30, 2017, Trump signed Proclamation 9632 declaring September 2017 as National Preparedness Month, encouraging “all Americans… take action to be prepared for disaster or emergency by making and practicing their plans,” also citing that fewer than half of American families report having an emergency response plan. While it is important to have a disaster plan in place for your family to take care of their physical needs, it is also vital to be prepared for the possibility of scams and fraudulent activity in the wake of a natural disaster such as Hurricane Harvey.

Price Gouging

The Federal Emergency Management Agency lists several ways individuals can be susceptible to scams, including fraudulent house inspectors, contractors, or charities asking for donations. Individuals can be scammed into giving donations to false charities or paying extra for services that are immediately needed to repair their homes (“price gouging”). Currently no federal legislation regulates price gouging, but there are 34 states with legislation protecting individuals. Generally, the legislation in these states identifies three elements of gouging: 1) actions taken during an emergency; 2) types of goods protected; and 3) maximum limits for price increases.

Texas, the primary state affected by Hurricane Harvey, has statutes protecting only the sale of necessities with an allowable price increase up to unconscionability. Essentially, Texas regulators can interpret the statute’s protected goods and allowable price limits very broadly, and it may not be immediately clear how much businesses will be allowed to mark up their products. Thus, individuals struggling to rebuild their lives in the affected area may be vulnerable to unfair price gouging, especially if regulators can deem the increase in price as reasonable given the circumstances.

Stock Fraud

Fraudulent investment opportunities are also harmful as they could affect even individuals outside of the disaster area. The Financial Industry Regulatory Authority (FINRA) issued an alert warning investors of investment scams promising huge returns in the wake of Hurricane Harvey. According to FINRA, common scams include “crowdfunding investments associated with clean-up, rebuilding, and breakthroughs in science and technology that purport to address current and future flood-related issues.” Communications about these opportunities are generally unsolicited and FINRA recommends investigating the opportunity thoroughly before investing. If the opportunity is a stock and doesn’t meet the requirements for a U.S.-based stock exchange (i.e. NASDAQ or NYSE), it will generally be quoted on an over-the-counter (OTC) platform. While OTC markets are normally functional, their “lack of transparency” can cause serious issues in times of stress, such as a natural disaster. Thus, in the wake of Hurricane Harvey, investors should be entirely skeptical of opportunities that present themselves on their own and require trading through markets with minimal listing requirements.

The Securities and Exchange Commission (SEC) is also monitoring the impact of Hurricane Harvey. Given the nature of the disaster it is entirely possible for affected individuals and companies to miss deadlines and other regulatory requirements or lose access to their securities accounts altogether, and the SEC is willing to work with these entities to grant relief. Any suspicious solicitations should be tracked and reported.

While natural disasters such as a hurricane can bring out the best in people, it can also leave them vulnerable to harm. While this is not a complete list of possible unlawful activities, individuals should take the necessary steps to protect themselves financially as well as physically. In addition to listing common fraudulent activities for the public to be aware of, the FEMA, FINRA, SEC, and other regulatory organization websites all have simple guidelines for spotting these scams and keeping your family secure in the wake of a devastating event.

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