Don’t Get Scammed by Investment Fraud on the Internet

By Lori J. Schock, Director, Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission

Social media and the Internet have become important tools for investors—both younger and older. Searching for stock research, guidance on investment strategies, and the latest business news are just some of the uses. Discussing and chatting about stock picks are others. Social media and the Internet provide not only a wealth of information for investors but also opportunities for those looking to take advantage of innocent victims.

Scam artists use social media and the Internet to conduct complex frauds and schemes that even the most seasoned investor may have trouble detecting. They spread false or misleading information and conceal their identities or even impersonate credible sources of market information. They may even create a webpage that uses a company’s logo, links to a company’s actual website, or references the name of a real person who works for the company. The Internet allows fraudsters to reach wide audiences—even global—with minimal effort and at low cost often with just the click of a send button.

While fraudsters are constantly changing the way they conduct schemes, there are things you can do to help protect yourself. 

Keep Your Eye Out for These Common Scams

Here are examples of the types of schemes you should be on the lookout for when using social media and the Internet:

  • Unsolicited Offers to Invest. Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards, often through an unsolicited sales pitch, meaning you didn’t ask for it and don’t know the sender. By using spam, personalized messages can reach millions of unknowing victims. If you see a new unsolicited post on your wall, a tweet mentioning you, an e-mail, or any other unsolicited communication regarding a so-called investment opportunity, you should exercise extreme caution.

  • Spreading False and Misleading Company Information. Fraudsters may exploit social media, such as Facebook, Twitter, bulletin boards, and chat rooms, by spreading false and misleading company information to affect a stock’s share price. The false or misleading rumors may urge investors to buy a stock quickly or sell before the price goes down. For example, in a pump-and-dump scheme, promoters “pump” up the stock price by spreading positive rumors that incite a buying frenzy and then quickly “dump” their own shares before the hype ends. Typically, after the promoters profit from their sales, the stock price drops and the remaining investors lose money.  

  • Fraudulent Online Investment Newsletters. While there are many legitimate investment newsletters, others are used to deceive investors. Online newsletters often are paid by companies to tout or recommend their stocks, which isn’t illegal if the newsletters disclose who paid them to promote the stock. Fraudulent newsletters will claim to offer independent, unbiased recommendations, but fail to explain conflicts of interest (or biases), including financial incentives they receive that influence their investment recommendations. Newsletters may also misrepresent the success of their investment recommendation’s track record. What makes it even harder to spot fraudulent newsletters is that many are advertised on legitimate websites, including the online financial pages of news organizations, and this does not make them any less fraudulent.

  • Advance Fee Fraud. Advance fee frauds ask investors, often through email, to pay a fee up front in advance of receiving any proceeds, money, stock, or warrants. The fee may be described as a deposit, underwriting or processing fee, a commission, tax, or even an incidental expense that fraudsters guarantee to repay later. Investors may be directed to wire advance fees to escrow agents or lawyers in order to make the payment seem legitimate. Advance fee fraud schemes also may try to fool investors with official sounding websites and email addresses. Watch out for a website or correspondence claiming to be from a U.S. government agency if the website or email address does not end in ".gov," “.mil,” or “fed.us.”

  • Internet-Based Fraudulent Offerings. An offering fraud involves a security that is offered to the public where the terms of the offer are materially misrepresented. The offering, which can be made online, may make misrepresentations about the likelihood of a return to investors. For example, in a recent case, the SEC alleged that a website was used to offer investors a guaranteed return of 1.2 percent per day. Investors should also be alert to whether an offering has been registered with the SEC. Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption to registration is available. While there are legitimate unregistered offerings used by companies to raise funds from investors, fraudulent unregistered offerings are often used to conduct investment scams.

  • High-Yield Investment Programs. High-yield investment programs are unregistered investments typically run by unlicensed individuals and are very often frauds. The hallmark of a high-yield scam is the promise of extraordinary returns at little or no risk to the investor. A website promoting a high-yield investment might promise annual (or even monthly, weekly, or daily) returns of 30 or 40 percent or more. In a recent case, the SEC alleged that the promoters advertised "huge, lucrative, handsome, and guaranteed" profits with “minimal” risk.  These scams may use the term prime bank program. Fraudsters may promote a high-yield scam by encouraging investors to use social media to share information about a high-yield website with others.

Tips to Help Avoid Online Fraud

You can take steps to protect yourself while using the Internet and social media by becoming an educated investor. Below are five tips to help you avoid investment fraud on social media and the Internet:

  1. Be wary of an unsolicited offer to invest. If you receive an unsolicited message from someone you do not know regarding a “can’t miss investment,” pass up the offer and consider reporting it to the SEC.

  2. Look out for affinity fraud. Never make an investment based solely on the recommendation of a member of an organization or group to which you belong. You should use independent information to evaluate any financial opportunity, even those recommended by people you know.

  3. Research the investment and the investment professional. Never rely solely on a testimonial or take a promoter’s word at face value in making an investment. You can check out many investments using the SEC’s EDGAR database or your state’s securities regulator. You can check out registered investment advisers at the SEC’s Investment Adviser Public Disclosure website and registered brokers at the BrokerCheck website of the Financial Industry Regulatory Authority.

  4. Be thoughtful about privacy and security settings. Unless you guard your personal information, it may be available to anyone with access to the Internet, including fraudsters. If you use social media websites as a tool for investing, be aware of the features on these websites that help you protect your privacy and personal information.

  5. Ask questions and check out everything. Be skeptical and research every aspect of an offer before making a decision. It’s your money and if you don’t understand something, ask questions until you are satisfied.

Invest Wisely and Safely

With some basic understanding of how scam artists work, you can avoid fraud and protect your hard-earned money. Learning how to invest safely can mean a big difference in your retirement years.

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