Avoiding Pump-and-Dump Scams Like TAXI

Readers:

Learn as much as you can about Pump-and-Dump Scams like TAXI through some excellent SEC sources:

Investor Alert: Social Media and Investing – Avoiding Fraud

Pump-and-Dumps and Market Manipulations

Internet Fraud:  How to Avoid Internet Investment Scams

Excerpts follow:

“…pump-and-dump schemes involve the touting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms.

Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch.

Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks.

In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create.

Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money…

Internet Fraud

The Internet is a useful way to reach a mass audience without spending a lot of time or money.  A website, online message, or “spam” e-mails can reach large numbers with minimum effort.  It’s easy for fraudsters to make their messages look real and credible and sometimes hard for investors to tell the difference between fact and fiction.  That’s why you should think twice before you invest your money in any opportunity you find online.

Here are some of the ways investors can be tricked online:

Online Investment Newsletters

While legitimate online newsletters may contain valuable information, others are tools for fraud.

Some companies pay online newsletters to “tout” or recommend their stocks.  Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock.  But fraudsters often lie about the payments they receive and their track records in recommending stocks.

Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks.  They may spread false information to promote worthless stocks.  To learn more, read our tips for checking out newsletters.

Online Bulletin Boards

Online bulletin boards are a way for investors to share information.  While some messages may be true, many turn out to be bogus – or even scams.  Fraudsters may use online discussions to pump up a company or pretend to reveal “inside” information about upcoming announcements, new products, or lucrative contracts.

You may never know for certain who you’re dealing with, or whether they’re credible, because many sites allow users to hide their identity behind multiple aliases.  People claiming to be unbiased observers may actually be insiders, large shareholders, or paid promoters.  One person can easily create the illusion of widespread interest in a small, thinly traded stock by posting numerous messages under various aliases.

Pump and Dump Schemes

“Pump and dump” schemes have two parts.  In the first, promoters try to boost the price of a stock with false or misleading statements about the company.  Once the stock price has been pumped up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of the stock, dumping shares into the market.

These schemes often occur on the Internet where it is common to see messages urging readers to buy a stock quickly.  Often, the promoters will claim to have “inside” information about a development that will be positive for the stock.  After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.

Pump and dump schemes typically involve little-known microcap companies.  For more information, read Microcap Stock: A Guide for Investors.

Spam

“Spam” – junk e-mail – often is used to promote bogus investment schemes or to spread false information about a company.  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.  Many scams, including advance fee frauds, use spam to reach potential victims.

To learn how to protect yourself online and other tips for investing wisely, visit www.investor.gov

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert

to help investors be better aware of fraudulent investment schemes that may involve social media.

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 may find attractive.

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. That potential for anonymity can make it harder for fraudsters to be held accountable. As a result, investors need to use caution when using social media when considering an investment.

What You Can Do To Protect Yourself – Tips to Help Avoid Fraud Online

So, what can individual investors do to use social media, while at the same time protecting themselves?

The key to avoiding investment fraud on the Internet is to be an educated investor.

Below are five tips to help you avoid investment fraud on the Internet:

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.

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.

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.

For more information on privacy and security settings, as well as other guidance regarding setting up on-line accounts with an eye toward avoiding investment fraud, see our Investor Bulletin Social Media and Investing: Understanding Your Accounts.

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.

See our publication “Ask Questions” for more about information you should gather before making an investment.

A Few Common Investment Scams Using Social Media and the Internet

While fraudsters are constantly changing the way they approach victims on the Internet, there are a number of common scams of which you should be aware.

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

“Pump-and-Dumps” and Market Manipulations

“Pump-and-dump” schemes involve the touting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace.

These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms.

Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch.

Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks.

In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create.

Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money.

For an example of an actual case, see Securities and Exchange Commission v. Carol McKeown, Daniel F. Ryan, Meadow Vista Financial Corp., and Downshire Capital, Inc., Civil Action No. 10-80748-CIV-COHN (S.D. Fla. June 23, 2010).

Fraud Using “Research Opinions,” Online Investment Newsletters, and Spam Blasts

While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks.

Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock.  But fraudsters often lie about the payments they receive and their track records in recommending stocks.

Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks – often, but not always, penny stocks.

The fact that these so-called “newsletters” may be advertised on legitimate websites, including on the online financial pages of news organizations, does not mean that they are not fraudulent.

To learn more, read our tips for checking out newsletters.

For an example of an actual case, see Securities and Exchange Commission v.Wall Street Capital Funding LLC, Philip Cardwell, Roy Campbell, and Aaron Hume, Civil Action No. 11-cv-20413-DLG (S.D. Fla. February 7, 2011)….

Where can I go for help?

Investors who learn of investing opportunities from social media should always be on the lookout for fraud. If you have a question or concern about an investment, or you think you have encountered fraud, please contact the SEC, FINRA, or your state securities regulator to report the fraud and to get assistance.

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

 

 

 

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