Director fraud occurs where a director of a company uses investors' funds for personal gain. It may also be called director theft or misappropriation of funds.

It's a criminal offence for a director of a company to misuse investors' money for personal gain. When this happens, investors can lose some or all of their investment.

Warning signs of director fraud

There are some common signs that may indicate something is not right with the company you have invested in. This can be when the company:

• continually raises funds, but it isn't clear what it's using the funds for
• doesn't release updates on their exploration or research and development (R&D) activities
• pays large consulting or service fees to related parties
• accounts have many unexplained or unusual expenses
• takes on loans, asset sales or purchase agreements with related parties where there is no clear business purpose

Illegal phoenix activity

Illegal phoenix activity occurs when a director of a company that can't pay its debts transfers the company's assets to a new company for little or no payment. Directors take this action to avoid paying creditors of the old company when it's liquidated.

Find out more about illegal phoenix activity on the ASIC website.

How to protect your investments

Minimise your chance of loss by researching companies before and after you invest.

Before you invest

• If the company is issuing new shares on the market, read the prospectus carefully.
• Research the company's business and the directors (including other directorships they hold or have held). Search ASIC Connect's Professional Registers and check the list of companies you should not deal with.
• Read the company's financial statements and remuneration report.
• Check if anyone recommending the investment has a personal involvement in the company or will receive any benefits.
• Seek independent financial advice if you're not sure.

See choosing shares to buy for more information on researching companies.

After you invest

When you've invested money in a business, monitor the company's progress by:

• reading the company's annual report
• checking for any continuous disclosure announcements to identify red flags
• attending the company's annual general meeting to ask the directors questions

Find out the other things you can do to keep track of your investments.

What to do if you are a victim of director fraud

If you think a company director is defrauding investors by using company funds for personal gain, you can report it to your local police.

You can also report misconduct to ASIC through the ASIC website.