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Don’t Let Greed Lure You Into Stock Market Scams

Stock-Markets / Stock Markets 2014 Nov 03, 2014 - 07:08 PM GMT

By: Sy_Harding

Stock-Markets

The market’s favorable winter season has arrived. The market is breaking out to new highs. Investor optimism and confidence are very high.

Unfortunately, this is opportunity time not just for normal investing, but also high season for those perpetrating frauds on unwary but confident investors.

Hampered by limited time, experience, and access to data and information on which to base research, the investment choices of most busy middle-class investors comes down to investing based on brief recommendations gleaned from various sources.


Most would deny they are investing on ‘tips’. That sounds so unprofessional.

Yet, many investors accept the stock or mutual fund recommendations of well-meaning friends, and even strangers in chat rooms, or on social media sites like Twitter and Facebook. Depending on how insistent and convincing they are, they can be quite appealing. Investors acting on those tips don’t seem to realize that those people, as well-intentioned as they may be, also do not have the time or facilities for research, and are probably just passing along tips they received elsewhere.

At worst, investors may be victimized by the deliberate scams that permeate the Internet, social media sites, bulk sent e-mails, direct-mail advertising, and ‘boiler room’ call centers.

You say that could never happen to you. You are too sophisticated to fall for scams, can easily detect crooks and con men. They are just so easy to spot.

Tell that to the sophisticated and knowledgeable investors taken in to the tune of $billions by Bernie Madoff, and Allen Stanford (Stanford International Bank).

Tell it to the victims in the 18,386 scam cases investigated in just 12 months in 2012.

So please do pay attention.

A survey conducted by the FINRA Investor Education Foundation in 2013 found that:

· Fully 80% of respondents had been solicited to participate in potentially fraudulent offers, and 11% lost a significant amount of money by engaging in the offer.

· Thirty-four percent of those victimized reported they were introduced to the promoter of the fraud through a mutual friend (who was also usually an unwitting victim).

An FBI warning in 2010 noted that when innocent investors lose significant amounts of money in scams and frauds, many don’t even realize they were scammed, thinking they had simply made a poor stock or investment choice.

The major frauds, like those of Madoff and Stanford, attract media attention.

However, the majority of scams and frauds take place in small towns and cities, in local operations, often run by people investors know personally and think they can trust.

Just a couple of examples taken from the IRS website (www.irs.gov):

“In Kansas City, Mo., an attorney and ordained bishop, was sentenced to 40 years in prison and ordered to pay $30 million is restitution. According to court documents, from 2000 to 2010, he convinced investors to loan a total of $52.5 million to a plan he called the British Lending Program. Investors believed they were loaning money for legitimate real estate development in England. In reality, the conspirators kept most of the money, with some being used to pay interest to the ‘investors’ to keep the scheme alive for ten years.”

“In Tulsa Okla., Jimmy E. Morrisett, sentenced to 9 years in prison, pleaded guilty to victimizing investors over a four-year period, promising substantial returns from investing in oil and gas properties. However, most of the returns came from money provided by the investors themselves. Many of the investors were elderly and lost their life savings.”

A warning on the FBI’s website included the example of a scam involving 600 victims in which it said, “We assisted a doctor from a prestigious hospital who began suffering from severe depression after learning of the scam and becoming unable to work. We worked with a man suffering from MS whose stockbroker had fallen for the scheme and liquidated the man’s pension and IRA to buy the stock for him, which left him nearly penniless.”

The websites of the SEC (www.SEC. gov), the IRS, the Financial Industry Regulatory Authority (www.finra.org), the FBI (www.fbi.gov) and others warn of stock scams, investment scams, reverse mortgage scams, internet fraud, Ponzi schemes, advance-fee frauds, telemarketing fraud, redemption bond schemes, and so on.

Most scams however, seem to involve ‘pump and dump’ stock scams.

The phrase refers to fraudsters buying shares of low-priced, thinly traded stocks, or even the stock of inactive or bankrupt companies on the cheap. They then aggressively promote the companies as poised for impressive growth for some plausible-sounding reason. After that ‘pumps up’ the stock price sufficiently the fraudsters ‘dump’ the stock, the price plunges, and investors are left holding the empty bag.

Pump and dump schemes have been a problem for 200 years. But with the advent of e-mails and the Internet they have become much easier to carry out. The scams used to have to depend on cold calls and direct mail solicitations. These days investors actively surf the internet looking for free stock ‘research’ and advice, and often pass what they find along via e-mails to friends.

How easy are pump and dump schemes to promote?

An example on the IRS website earlier this year referred to three students at Georgetown University who “created a website that published a "Stock Pick of the Week'' every Monday morning. Those attracted to the website were not aware that the seemingly well-informed financial ‘analysts’ were students trying to make a quick buck. Thousands of investors flooded into the published stock recommendation each Monday morning, driving its price temporarily higher. In a classic ‘pump and dump’ operation, the students, subsequently charged with fraud, promptly sold the stocks each time, and soon had a $350,000 profit on the scheme.”

Investors understandably want to get in on the ground floor of the next new industry. Pump and dump scamsters are well aware that many will jump in with little investigation if the story is compelling enough. FINRA recently noted that, “The former CEO of one of the thinly-traded, heavily touted companies that purport to be in the medical marijuana business was recently indicted for his role in a previous multi-million dollar mortgage-based Ponzi scheme.”

The SEC warns that investors need to be particularly careful about “those recommending stocks, or supposedly providing ‘inside’ information’, on Internet bulletin boards and comment sections of financial websites. They may be fraudsters using aliases, or people paid to tout the stock the fraudsters are attempting to pump up.”

They also warn about opening unsolicited junk email, a favorite tool of phony investment promotions.

If you can’t resist opening e-mails from people you don’t know because they have intriguing subject lines, at least know the risk you are running. The McAfee Security firm says, “Most spam promotes get-rich schemes, questionable products, and fraudulent offers. It’s very cheap for the sender to distribute, and now can be very dangerous, since cyber criminals also use deceptive e-mails to steal identities.”

Of course, not all Microcap stocks are phony or pump and dump schemes.

However, if you want to invest in Microcap stocks, at least go to the websites of the SEC and FINRA. They provide the steps that should be taken to check out the legitimacy of a company being promoted to you.

There were 18,386 scam cases investigated in just 12 months in 2012. Don’t become part of the statistics for 2015.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2014 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

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