Call it investor fraud 2.0.
Less than one week into 2012, the Securities and Exchange Commission charged an Illinois man with peddling more than $500 billion in fictitious securities. While the dollar amount may be eye-popping, the real cause for concern is that the alleged fraudster perpetrated his crime by promoting the securities through discussion groups on LinkedIn, a business-oriented social networking site used by millions of professionals.
“Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” Robert B. Kaplan, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement after charges had been filed.
Increasingly, criminals are using social networking platforms such as LinkedIn and Facebook to pitch their scams — everything from dodgy commodities schemes to phony securities. Unfortunately, those new methods are proving quite effective, says Gerri Walsh, president of the Investor Education Foundation, the Washington, D.C.-based consumer education arm of the Financial Industry Regulatory Authority, or FINRA, which regulates securities firms.
“It’s a new play on affinity,” Walsh says. “Previously, fraudsters would target a community or a church. But social networks allow them to expand their reach.”
According to Walsh, fraudsters are increasingly turning to social networks to find the most likely victims because the sites allow them to identify individuals who have expressed an interest in a particular type of investment. Armed with that knowledge, fraudsters can tailor their new-media message for maximum effect.
The fraudster’s message is also more likely to go viral, thanks to Web 2.0 technologies, says Louis L. Straney, a Santa Fe, N.M.-based author of books on securities fraud.
“What’s changed in recent years is the ability of this kind of investment fraud to go global,” Straney says. “A fraudster can penetrate a group within a social network, which reinforces the perception that they’re offering a legitimate investment because people see their friends getting in on what looks like a good deal.”
Old scams, new pitches
While new scams pop up all the time, criminals are often just hitting the refresh button on an old idea.
“Fictitious business scams have been around for centuries,” Straney says, pointing out that in the 1820s a Scotsman named Gregor MacGregor fabricated an entire country he called Poyais and duped his victims into buying land, government titles and franchises relating to the nonexistent country.
Today’s fraudsters peddle equally bold claims through slick websites, according to Straney, who says criminals also have been known to hype these businesses in online forums. But these days, the widespread accessibility of information online also can be used against victims.
“There’s almost always some nugget of truth with all of these frauds,” Straney says. “Very often, the pitch will key off of something potential victims may have read in the news.”
For instance, with rising gold prices, there are a lot of scams these days that play up that particular angle, Straney says. Pitches referencing a particular investor such as Warren Buffett or a play on a new business model such as Internet advertising are also common. Keying off of information someone might have read elsewhere makes the pitch seem legitimate, and with new-media criminals, move that much faster.
“If you see a news story on Yahoo, there’s a good chance that right at that same moment a scammer is figuring out how he’s going to work it into his pitch,” Straney says.
There’s almost always a promise of inside information, too.
“A big part of why this stuff works is that fraudsters get people believing that their method for making money is going to pay off because they have information nobody else has,” says Lynndel Edgington, who spent 18 years working in the financial services industry before founding Eagle Research Associates Inc., a Mission Viejo, Calif.-based nonprofit that educates consumers and works with law enforcement to track scammers.
“These pitches have been around for years, but they’ve moved from hotel rooms to online forums, and the scammers use the fact that they don’t have a brick-and-mortar location to play up the offer’s exclusivity,” Edgington says.
There’s also the greed factor.
“Scammers always promise way more than you’d likely get with a legitimate investment,” Edgington says. “But that old rule is as good as ever, even in the Internet age. If it sounds too good to be true, it is.”
While technology has made it easier for fraudsters to perpetrate their crimes, it can also be a force for good.
“Protecting yourself comes down to ask and check,” Walsh says. “Ask the person pitching you the investment if they’re licensed or registered to do so, and then check them out.”
FINRA offers investors free access to BrokerCheck, an online tool that contains information on 1.3 million current and former FINRA-registered brokers as well 17,000 current and former FINRA-registered brokerage firms. Legitimate securities brokers and firms that sell stocks and bonds can also be verified with the Securities and Exchange Commission. And investors can always contact financial regulators in their home state to verify the credentials of the person or firm offering any type of investment.
“Financial instruments are regulated by a number of different agencies, so it may seem difficult at first to determine who you need to call to check,” Straney says. “But the key thing to remember is that bad guys don’t register, so right up front you’ll want to ask the person pitching you where they’re licensed or registered — and then verify that information.”