March, 2012:

In our continued effort to educate the investing public about various aspects of the securities markets and fraudulent activity associated therewith, we are providing the below information. Because this information is being provided for educational purposes only, it should not be relied upon as providing legal or investment advice. Moreover, it is not intended to be complete in all material respects. If you have any questions concerning the information set forth below, you should contact a qualified professional.

Worthless Stock:  Con artists across the globe have stepped up their efforts to rip off investors, especially non-U.S. residents who have lost money in the U.S. securities markets. While it’s natural to want to recoup one’s losses as quickly and as fully as possible, the Securities and Exchange Commission (SEC) has warned investors to be extremely skeptical of offers to exchange worthless or poorly performing stocks for blue chips or “hot” performers.

Worthless stock is typically just that – worthless.  And anyone who promises a quick way to recover from a bad investment is probably just lying to you. You are encouraged to thoroughly investigate any investment opportunity, as well as the person promoting it, before you part with your money. This is especially critical if you are a non-U.S. investor seeking to invest in U.S. stocks – or if you learn about the opportunity over the telephone from a broker you don’t know. The “broker” may well be a con artist, and the deal may be a dud. Remember, if an offer sounds too good to be true, it probably isn’t true.

This alert tells you how to spot potential “stock swap” scams and how to evaluate the offers you hear about.

What You Need to Watch Out For:

Although fraudsters use a wide variety of techniques to carry out their “worthless stock swap” scams, most of these frauds boil down to a predictable formula: a persuasive pitch, which nearly always contains false assurances of legitimacy, followed by demands for money. Here are some “red flags” to avoid:

Aggressive Cold Calls from “Boiler-Rooms” – Con artists posing as U.S. or United Kingdom brokers will first identify investors who have lost money investing in “microcap” stocks, the low-priced and thinly traded stocks issued by the smallest of U.S. companies. Operating from remote boiler-rooms, they then mount an aggressive cold calling or emailing campaign, focusing their pitch on loss recovery. They might offer to swap a poorly performing stock for an established, blue chip stock – or they will claim that their firm or an anonymous “client” wants to purchase the shares directly.

Impressive Websites Serving as Fronts for Virtual Offices – To make their schemes appear convincing, fraudsters will invite you to visit “their” website – which will have pages of detailed information and perhaps a photo or biography of the broker. But all too often the site will be nothing more than a fraudulent copy of a legitimate firm’s website – with changes made only to the name and contact information. The con artists will adopt fake yet familiar-sounding names and operate out of virtual offices, using phony addresses, remote mail drops, and redirected phone and facsimile numbers to carry out their scams.

Self-Provided References – Knowing that regulators encourage investors to investigate before they invest, fraudsters often pretend to do the same. They will falsely assure you that the investment is properly registered with the appropriate agency and purport to give you the agency’s telephone number so that you can verify that “fact.” Sometimes they will give you the name of a real agency – other times they will fabricate one. But even if the agency does exist, the contact information invariably will be false. Instead of speaking with a government official, you’ll reach the fraudsters or their colleagues – who will give the company, the promoter, or the transaction high marks.

Claims of Government “Approval” – Another ruse fraudsters use to appear credible involves the misuse of federal agency seals, including the seals of the SEC and the Federal Trade Commission. They will copy the official seal from the regulator’s website and use it to create fake letterhead for a fictitious letter of approval. But you should know that the SEC and FTC – like other state and federal regulators in the U.S. and around the world – do not “approve” or “endorse” any particular stock transactions or “loss recovery” programs.

Advance Payment Requests – Regardless of how the fraudsters pitch their offers to “help”, there’s always a catch. Before they will complete the deal, they first will ask for an upfront “security deposit” or “margin payment” – or claim that you must post an “insurance” or “performance bond.” The minute you pay the advance fee, the fraudsters nearly always disappear – leaving you with new losses. If you seem willing to make further payments, the con artists may instead keep asking for more – falsely claiming that the market price of the security has changed or that the payments will cover additional fees, taxes, bonds for the courier service, or other similar expenses. Only when you finally run out of patience or money to chase your losses do the fraudsters disappear for good.