How is the Internet used to defraud investors?
Internet sites such as Facebook, Twitter, YouTube, Linked-In and the like have become prime sources for finding and sharing information for investors, who can research stocks, check out financial advisors and brokers, get the latest investor news, develop investment strategy or communicate with other investors and advisors.
However, the Internet has also become a useful tool for investment fraud, with online perpetrators becoming increasingly good at looking like a legitimate presence with fraudulent websites, email and other communications. Some examples:
Unsolicited offers — check that chat!
Social media sites, including chat rooms and bulletin boards, are key places for fraudsters to find victims. Be wary of a tweet or a direct message or email from an unsolicited source about an “exciting investment opportunity.” Modern electronic technology allows “spammers” to send millions of personalized emails about “can’t miss” investments and other opportunities. Suspicious activity can be reported to the SEC Complaint Center. Some things to watch out for:
- If it looks too good to be true, it probably is. Compare the “incredible” promised returns with those of reputable stock indexes. If promised returns are much more, consider it high risk, if not actual fraud.
- “Guaranteed” returns. Most healthy returns are far from guaranteed. Don’t believe it.
- Pressure to act right now, lest this golden moment pass you by: a time-honored tactic to snare you. Always take the time to check out the offer. Be especially suspicious of “once-in-a-lifetime” opportunities based on exclusive “inside information.”
Don’t make an investment based solely on the advice of a member of an online group you’re in. Fraudsters love to prey on such groups, seeking to connect with the group and the informal communications among its members. Even if the advice is from someone you know, that person may have been fooled by the fraudulent “hot tip” or investment scheme he or she is unknowingly promoting.
Use privacy and security settings
Be aware of how the information you provide on social networks and other sites could be accessed by those who are not your friends but fraudsters. Make sure you know how any privacy or security settings work in this regard.
Question and research
It pays to have a skeptical eye and research the truth of every statement made in an online offer as well as ch:
- SEC’s EDGAR filing system or your state’s securities regulator.
- FINRA’s BrokerCheck website
- SEC’s Investment Adviser Public Disclosure website
There are a number of tried and true scams on the Internet. Here are some common ones.
‘Pump and Dump’
“Pump and Dump” schemes promote a company’s stock with false and misleading statements on bulletin boards and websites urging readers to buy or sell a stock quickly before the price goes down. Often it cites inside information, or a foolproof method of stock selection. These claims may come from company insiders or paid promoters who stand to gain, as their shares are “pumped” up by a buying frenzy they create. Once they sell or “dump” their shares and stop hyping the stock, the price goes down, and the investors lose money.
Fraudulent information sites
Fraud can look very respectable. And to be sure, there are legitimate websites and web-based newsletters that provide investment information and advice. Companies may also pay newsletters to tout specific stocks and this is legal as long as the newsletters disclose who is paying them, how much they are paying, and by what means.
However, fraudsters often lie about such information and may claim to be independent, unbiased purveyors of investment information while standing to profit handsomely by convincing others to buy certain stocks, especially penny stocks.
But even worse, some of these newsletters may be advertised on legitimate websites, including the online financial pages of news organizations. To help discern what is legitimate, go to the SEC’s tips for checking out newsletters.
High Yield Programs
High-yield investment programs (HYIPs) are unregistered investments most often run by unlicensed individuals that are often frauds. They promise superior returns at little or no risk to the investor. A HYIP website might promise annual, monthly, weekly or even daily returns of 30 or 40 percent or more. Some call themselves “prime bank” programs.
An offering fraud is a security of some kind that’s offered to the public with the terms materially misrepresented, especially regarding the likelihood of a return. Some offerings are not fraudulent as such, but fail to comply with relevant registration provisions of the federal securities laws. However, some offerings are also exempt from this provision. It’s always best to see if such offerings are registered with the SEC, a state, or otherwise exempt.
If you’re concerned about Internet fraud, contact the SEC, FINRA, or your state securities regulator.
U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295
Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, MD 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290
North American Securities Administrators Association (NASAA)
750 First Street, NE
Washington, DC 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571
[Sources: Investor.gov, U.S. Securities and Exchange Commission]