What Is a Credit Default Swap Scam?
The U.S. Securities and Exchange Commission (SEC) is responsible for regulating and enforcing securities laws across the country. When individuals and corporations violate these laws and commit fraud, they should be held accountable for their actions.
Whistleblowers are those brave individuals who become aware of such fraudulent activities and take risks to report their findings to the SEC. Because SEC whistleblowers do take such a personal risk in bringing pertinent information to the SEC, they are often able to win significant whistleblower awards for their efforts.
The corporate world of securities and derivatives markets can be quite complex, so recognizing schemes and fraud can be a challenge. One of these types of scams involves credit default swaps (CDS). Read on to learn more and see if you might be aware of a credit default swap scam in your company.
Defining Credit Default Swaps
A credit default swap is a type of derivative contract that works like insurance. The CDS seller agrees to make payments to the buyer. If the financial credit instrument winds up defaulting, the seller will receive a payout. A good example could be if the company buying the CDS was forced to file bankruptcy.
Banks are notorious for engaging in CDS markets, with Bank of America Corp. and JP Morgan Chase & Co. ranking among the most active banks working as both buyers and sellers of CDS’. Formerly considered to be a low-risk way to make money, CDS’ have risen to infamy over the years as CDS schemes became the norm.
When CDS Scams Emerge
Although a CDS is supposed to be a type of insurance, its market is not currently regulated. This means that the CDS derivatives can be swapped between companies and investors without regard to whether the CDS buyer can actually cover the loss in the event of a default.
When banks don’t have the resources to pay an investor if the security defaults; or if investors make transactions banking on a default payout that never comes to be, the CDS market puts investors, markets, and corporations at an increased risk for failure.
Work with a Qualified SEC Whistleblower Lawyer
If you believe you might have knowledge of CDS schemes, and you want to do the right thing by putting an end to such violations, get in touch with a highly trained SEC whistleblower lawyer at Meissner Associates.
You can schedule your initial tip evaluation today by calling our office at 1-866-764-3100 or by filling out the confidential contact form included below.