Mario Massillamany Answers: How are social media sites used to defraud investors?

Mario Massillamany

Mario Massillamany, Attorney

Popular social media sites on the Internet such as Facebook, Twitter, YouTube, Linked-In and similar online networks have become principal sources for finding and sharing information, and this is true for investors as well. Such online resources can help investors research stocks, check the background of financial advisors and brokers, get pertinent up-to-date news, guide investment strategy or just talk with other investors and advisors.

Unfortunately, these same resources have also become a useful tool for investment fraud, and such fraudsters have become increasingly clever at looking like a legitimate investment presence with their websites, email and other communications. Following are some of the ways in which they operate.

Unsolicited offers — check that chat!
Social media sites, including chat rooms and bulletin boards, are prime places for investment fraud criminals to find victims. If you see a tweet mentioning you, or receive a direct message or email from an unsolicited source about an investment opportunity, be very wary. Among other things, modern electronic technology allows “spammers” to send millions of personalized emails about “can’t miss” investments and other opportunities. You can report such suspicious activity to the SEC Complaint Center.

Common ‘Red Flags’
There are several common “red flags” that should alert you to likely investment fraud on the Internet.

  • If it looks too good to be true, it probably is. Compare the “incredible” promised returns with those of well-known stock indexes. If promised returns are significantly more, you’re looking at high-risk proposition if not actual fraud.
  • “Guaranteed” returns promised. Nothing that produces any significant return is guaranteed. Most healthy returns are quite far from guaranteed. Don’t believe it.
  • Pressure to act right now, lest this golden moment pass you by. Always take the time to check out these offers. Be especially suspicious of once-in-a-lifetime opportunities based on special “inside” information.

Affinity fraud
Don’t make an investment based solely on the advice of a member of an online group or chat room you belong to. Investment scams love to prey upon members of such groups, seeking credibility from the group and the informal communications among its members. Even if the recommendation is from someone you know, that person may have been fooled about the fraudulent “hot tip” or investment scheme he or she is unknowingly promoting.

Give thought to privacy and security settings
It’s great to have a way for old friends and relatives and classmates to find you on the web, but be mindful of how the information you provide 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.

Ask questions and check everything
There is no substitute for having a skeptical eye and researching the truth of every statement made in an online offer as well as checking the background of the promoter. Do not take the word of the promoter. Some of the sources that can help with this are:

See the SEC’s website at for its publication, “Ask Questions,” about the information you should have before making an investment.

What are some common Internet investment scams?

Fraudsters are constantly changing their approach to investment scams using social media and the Internet. Here are some common ones.

‘Pump and Dump’ market manipulation
“Pump and Dump” schemes involve touting a company’s stock through false and misleading statements on bulletin boards and websites urging readers to buy or sell a stock quickly before the price goes down. Often inside information is cited, or an infallible method of stock selection. These statements 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, costing the investors money.

Fraudulent information sites and newsletters
Sometimes fraud looks quite respectable. And there are legitimate websites and web-based newsletters that provide investment information and advice. Also some companies 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 from convincing others to buy certain stocks. Often this involves penny stocks.

To make matters 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 Investment Programs
High-yield investment programs (HYIPs) are unregistered investments usually 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.

Internet-based offerings
An offering fraud is a security of some kind that’s offered to the public where the terms are materially misrepresented, especially regarding the likelihood of a return. Some offerings are not fraudulent per se, but fail to comply with the applicable registration provisions of the federal securities laws. However, some offerings are also exempt from this provision. It’s always best to determine if such offerings are registered with the SEC or a state, or is otherwise exempt.

Where to find help
If you have a concern or question about possible 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
Suite 1140
Washington, DC 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571
[Source: U.S. Securities and Exchange Commission,]

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