Social Media and the Fraudsters

It is a fact that U.S. retail investors are increasingly turning to social media, including Facebook,YouTube,Twitter, LinkedIn and other online networks for information about investing.  Whether it be for research on particular stocks, background information on a broker-dealer or investment adviser, guidance on an overall investing strategy, up-to-date news, or to simply discuss the markets with others, social media has become a key tool for U.S. investors.

While social media can provide many benefits for investors, it also presents opportunities for fraudsters.  Social media, and the Internet generally, offer a number of attributes criminals find attractive.  For example, social media lets fraudsters contact many different people at a relatively low cost.  It is also easy to create a site, account, email, direct message, or webpage that looks and feels legitimate – and that feeling of legitimacy gives criminals a better chance to convince you to send them your money.  Finally, it can be difficult to track down the true account holders that use social media.  This anonymity makes it harder for fraudsters to be held accountable.  Therefore, it goes without saying that investors need to use caution when using social media when considering an investment.

Here are some easy to follow tips to help you avoid online fraud:

Be Wary of Unsolicited Offers to Invest:

Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards.  If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution.  An unsolicited sales pitch may be part of a fraudulent investment scheme.  Many scams use spam to reach potential victims. For example, with a bulk e-mail program, spammers can send personalized messages to millions of people at once for much less than the cost of cold calling or traditional mail.  If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center.

To demonstrate how prevelent this type of communication is, I get at least two or three such contacts each week relating to unsolicited offers to legally represent someone in the collection of a debt.  Some are very conviencing.  The only reason that I have not been defrauded is though the exercise of due diligence on my part.

Look out for Common “Red Flags”

Wherever you come across a recommendation for an investment – be it on the Internet or from a personal friend (or both), the following “red flags” should cause you to use extreme caution in making an investment decision:

  • It sounds too good to be true. Any investment that sounds too good to be true probably is. Compare any promised return with the returns on well-known stock indexes. Any investment opportunity that claims you’ll receive substantially more than that could be highly risky – or be an outright fraud. Be extremely wary of claims on a website that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK” or has “HUGE UPSIDE AND ALMOST NO RISK!” Claims like these are hallmarks of extreme risk or outright fraud.
  • The promise of “guaranteed” returns. Every investment entails some level of risk, which is reflected in the rate of return you can expect to receive. If your investment is 100% safe, you’ll most likely get a low return. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment “can’t miss.” Don’t believe it.

Pressure to buy RIGHT NOW.

Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.”  Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.

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, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups.  Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

For examples of affinity fraud, the reader need look no further than the affinity fraud section of this blog.

Be Thoughtful About Privacy and Security Settings

Investors who use social media websites as a tool for investing should be mindful of the various features on these websites in order to protect their privacy and help avoid fraud.  Understand that unless you guard personal information, it may be available not only for your friends, but for anyone with access to the Internet – including fraudsters.

Ask Questions and Check Out Everything

Be skeptical and research every aspect of an offer before making a decision. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Never rely on a testimonial or take a promoter’s word at face value. You can check out many investments using the SEC’s EDGAR filing system or your state’s securities regulator. You can check out registered brokers at FINRA’s BrokerCheck website and registered investment advisers at the SEC’s Investment Adviser Public Disclosure website.

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