Investment Fraud Online

Investment scams are on the rise, according to the Federal Trade Commission. Consumers reportedly lost $8.8 billion by investing in investment scams in 2022, a 30% increase from 2021. More than ever, scammers are finding their victims online. Advances in artificial intelligence are also helping scammers persuade victims to send money and buy fake stocks or other securities– the grift may be as simple as using ChatGPT to write a convincing description of an investment. Advanced scams have involved using AI to clone a financial advisor’s voice.

What is Investment Fraud?

Online scammers are perpetrating increasingly sophisticated investment fraud. This type of fraud occurs when someone tries to trick or deceive you into investing money in a fraudulent asset. Investment fraud includes any type of deceit or manipulation in the sale of securities. Scammers may sell investors securities that are entirely fictional. 

Securities laws exist to maintain the public’s confidence in the stock market. Violations of these laws constitute investment fraud. Regulators like the Securities and Exchange Commission and the Financial Industry Regulatory Authority enforce rules designed to prevent securities fraud. These crimes are prevalent, and regulators struggle to keep up with enforcement. It is often up to the defrauded victims to pursue cases against scammers.

Investment Fraud Examples: Online Scammers

The SEC has published an investor alert bulletin warning investors of the following types of investment fraud. Online forums are increasingly rife with the following scams: 

• Pump and Dump: Pump-and-dump schemes are some of the most common investment frauds online. In this type of scam, promoters tout an investment –often a cryptocurrency—as a once-in-a-lifetime investment. Once enough of their social media followers have purchased the recommended crypto coin or stock, the price of the cryptocurrency explodes, at which point the promoters “dump” their shares.
• Touting: Promoters should disclose any commissions they receive in exchange for promoting an investment.
• Pressure to buy right away: The SEC warns that aggressive promotion of a stock is a warning sign of investment fraud.
• A fraudster might convince an investor to buy a fake investment. This investment either might be fake or may have failed to register with the SEC, in violation of securities laws. Cryptocurrencies are frequently featured in unregistered securities disputes.
• Investment fraud can also take place when working with a financial professional. Registered brokers and investment advisers routinely violate securities rules and regulations by recommending investments that are overly risky for an investor’s profile.

Investment Fraud Online: Scams on Social Media

Social media is a hotbed for scammers. Influencers can cash in on their audience by accepting payments to promote questionable investments. YouTube, Instagram, and Facebook are popular platforms for financial influencers (“finfluencers” for short) to promote questionable investments. Large-scale market manipulation is rampant on platforms like X (formerly Twitter), Telegraph, and Discord.

Crypto Investment Scams

Investors should be especially wary of cryptocurrencies and crypto exchanges. The SEC is still deciding how to classify cryptocurrency investments. Because of their lack of regulation, these investments are easy targets for scammers.

Alleged Crypto Securities Rule Violations

Recent FINRA settlements have demonstrated that brokers may suffer relatively light consequences after promoting worthless crypto tokens. In September 2023, a broker entered into an Acceptance, Waiver, and Consent agreement (AWC) with FINRA, in which the broker consented to the findings that he violated FINRA Rules participated in outside businesses that involved crypto assets. AWC agreements allow brokers to settle disputes with FINRA without consenting to or denying the findings. This outside business involved working for a social media marketing organization that recommended crypto asset investments. Brokers are supposed to have their outside businesses approved by their firm.

This broker also allegedly participated in private securities transactions. To facilitate these transactions, he reached out to potential investors and recommended they purchase crypto assets. Brokers who participate in undisclosed private securities transactions are in violation of FINRA Rule 3280. As a result of his alleged conduct, investors allegedly invested $245,000 with crypto asset developers.

The coins he promoted – PEEP and Level Up – are currently worthless. Another, EMAX, has lost over 90% of its value since 2021.

In spite of these alleged violations of FINRA rules, the broker only received a 12-month suspension and a $10,000 fine.

Investing “Experts”

Social media fraudsters may not even advertise a specific investment. Some of these fraudulent posters will say that they can teach you investing secrets that will help generate hefty returns.

Stock Pickers and an Alleged Pump-and-Dump Scheme

In 2022, the SEC charged seven individuals in a social media pump-and-dump scheme. The individuals posed as successful investors, and posted their plans to buy, hold, or add to their stock positions on Discord and Twitter. According to the SEC, these promotions led to fraudulent profits of $100 million.

Social Media Pyramid Schemes

Pyramid schemes are fraudulent enterprises that make money from new recruits rather than legitimate business enterprises. They often use social media platforms like Instagram and Facebook to advertise. Profiles that may or may not belong to real people hype up the scheme, telling followers that they have enjoyed easy earnings from their investment. Looms, circles of trust, blessing circles – these are all different names for the same type of scam. Invitees end up in a messaging application like Whatsapp where they receive instructions on where to send their funds, expecting to receive a return on their investment, only to never hear from their recruiter ever again.

SEC Allegations of a Pyramid Scheme

In 2022, the SEC alleged in a complaint that four individuals had proliferated a crypto-based securities fraud using social media. Highly produced YouTube videos advertised Forcount, an allegedly sham crypto asset trading and mining operation. Some of the videos showcased one of the alleged scam promoter’s luxurious lifestyle, a lifestyle that the SEC alleges the promoter subsidized with payments from new investors. The promoter allegedly used these videos to convince new investors that they too could quickly amass fabulous wealth.

Telltale Signs of an Investment Scam

Investors should know the telltale signs of a scam.

• Any investment that promises especially high returns with little to no risk is a scam.
• Look out for “IRS-Approved” investments. This phrase is common in fraudulent offerings.
• Stocks should come with a prospectus that describes the offeror’s business. Bonds should have official circulars. The absence of official documents should put investors off.
• Ponzi schemes use funds from new investors to pay off previous investors, presenting the payments as returns on a legitimate investment. Certain Ponzi schemes may masquerade under the name “high-yield investment programs.” They purport to be bonds that come with the potential for exceptionally high yields.
• Unscrupulous brokers tend to advertise seemingly clever investing tactics, like options contracts and margin investing. In reality, these investing tactics are too risky for most investors.
• Real estate investments and precious metals are also common lures for investment fraud.
• Crypto wallets are frequently used in investment fraud. Online ads for “investment opportunities” that require you to make a deposit in a crypto wallet should raise your suspicions.
• Fraudsters may promote low-priced stocks – also known as “penny stocks” or “microcap stocks” as especially promising, when in reality, the promoter knows that there is only a very slim chance that the investment will generate any return.

Financial Professionals and Social Media Scams

Fraudulent financial professionals – including FINRA-registered brokers and Registered Investment Advisers (RIAs)—often use social media to target a large audience with a fraudulent offering.

There are regulatory rules in place designed to curtail this type of activity.

Communications with the Public: FINRA Rule 2210

FINRA Rule 2210 dictates communications between registered brokers and the public, which would include posts on social media. The Rule sets out content standards, stating that no broker “may make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication.”

If a broker makes misleading statements on social media about an investment, the investor may be able to recover their investments by filing a complaint and going through FINRA arbitration or mediation. Brokerage firms typically require investors to use FINRA arbitration rather than suing for damages in a civil court. This is a niche area of law and personal injury attorneys and business lawyers are not experts in these proceedings – investors should consider speaking with a securities attorney.

FINRA published a report in January 2024 showing that 70% of crypto asset communications that the agency reviewed contained potential violations of FINRA Rule 2210.

Outside Businesses: FINRA Rule 3270

Firms are required to supervise their broker’s communication with clients, and brokers who want to solicit customers for investments in dubious crypto exchanges, for instance, may take to WhatsApp or Telegram. Brokers who are going outside of their firm in order to sell questionable investments may be in violation of FINRA Rule 3270. Rule 3270 requires brokers to receive permission from their member firm before they sell securities that are not approved by their firm. Investments that are not in the firm’s inventory are more likely to be fraudulent.

Failure to Supervise: FINRA Rule 3110

FINRA Rule 3110 requires firms to supervise their brokers. If a broker sells an unregistered security or sells a fraudulent offering, the firm may be held liable.

Can a Securities Attorney Help Me Recover from an Investment Scam?

Securities lawyers, also known as investment fraud lawyers, might not be the right representation for every investment scam. Our securities lawyers work with clients who lost money as a result of misconduct by a FINRA-registered broker. Sometimes these professionals are dually registered as investment advisers with the SEC. In many cases of online scams, the perpetrators are difficult to hold accountable because they are not registered financial professionals.

Reporting Investment Fraud: Online Resources

If the individual who recommended an investment is not a registered broker with a FINRA license, a securities attorney cannot help your case. At that point, you should report the FBI Internet Crime Division and the Federal Trade Commission. Victims can report precious metal scams to the Commodity Futures Trading Commission (CFTC).

A Financial Professional Convinced Me to Invest in a Scam. Now What?

If you believe you may have a case for a securities lawyer, contact Kurta Law today. Call (877) 600-0098 or email info@kurtalawfirm.com. Our securities attorneys offer free case evaluations and are experts in these examples of investment fraud. If you decide to pursue FINRA arbitration, investment fraud attorneys can guide you through each step of the process.