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SEC Issues Investor Alert To Warn Investors About Fake Brokers And Investment Advisers

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  • Posted on: Aug 4 2021

On July 27, 2021, the Securities and Exchange Commission’s (the “SEC” or the “Commission”) Office of Investor Education and Advocacy (“OIEA”) issued an investor alert (here) with the FBI Criminal Investigative Division about fraudsters who are posing as brokers or investment advisers (the “Alert”). According to the Alert, people looking to perpetrate a fraud on unsuspecting investors are, among other things, falsely claiming to be registered with the SEC, the Financial Industry Regulatory Authority (“FINRA”) or a state securities regulator. Sometimes, the fraudsters even impersonate a real investment professional who is actually registered with one of the foregoing organizations. In this regard, noted the OIEA, “[f]raudsters may misappropriate the name, address, registration number, logo, photo, or website likeness of a currently or previously registered firm or investment professional.”

To trick investors into believing that the scammer is legitimate, said the OIEA, the fraudster uses several tactics, including the following:

  • “Spoofing”. Spoofing generally occurs when someone or something pretends to be something else in an attempt to gain one’s confidence, get access to one’s systems, steal data, steal money, or spread malware. Spoofing attacks come in many forms, including, but not limited to, website and/or URL spoofing. The OIEA warned that fraudsters are using website and/or URL spoofing to scam unsuspecting investors. They do so by setting up websites using URL addresses or names similar to those of actual registered firms or investment professionals to trick investors into believing that the fraudster is registered or that the fraudster is affiliated with a registered firm or investment professional.
  • Creating Fake Profiles on Social Media. Here, the fraudster impersonates an actual person. They do so by creating a profile on a popular social media platform that mirrors a registered investment professional. Once created, the fraudster messages investors to solicit their money.
  • Cold Calling. Cold calling is a marketing technique in which a salesperson contacts an individual who has not previously expressed interest in the offered product or service. [For a discussion of cold calling, see here.] According to the OIEA, a fraudster may set up boiler rooms with teams of people cold calling investors to solicit their money while claiming to be employees of registered firms. In fact, the fraudster may use technology to make it appear they are calling from the firm’s location. [Ed. Note: “A boiler room is a place or operation—usually a call center—where high-pressure salespeople call lists of potential investors (‘sucker lists’) to peddle speculative, sometimes fraudulent, securities. Sucker lists identify victims of previous scams.” See discussion here. See also here.] 
  • Misrepresenting or Falsifying Documents. Fraudsters often recruit investors by misrepresenting that their firm was registered with the SEC, including pointing to the firm’s Form D filings to support the misrepresentation. See OIEA Investor Alert here. Fraudsters may solicit investors by impersonating a registered investment professional and generating a fake version of a public report using the professional’s name and CRD number. See FINRA Investor Alert here. [Ed. Note: The CRD is a program administered by FINRA. It contains the registration records of broker-dealer firms, branch offices, and their associated financial professionals, including their qualification, employment, and disclosure histories.]

In the Alert, the OIEA provides a number of ways in which investors can protect themselves from the foregoing scams. 

1.  Verify the Identity of the Person Offering an Investment. Investors should not blindly rely on the website or contact information provided by the person seeking one’s money. The OIEA says that investors should be skeptical and refrain from turning over one’s money if fraud is suspected: “If you suspect someone is falsely claiming to be registered with the SEC, do not give the person any money and do not share your personal information.” 

Investors can visit to check if someone offering an investment is currently licensed or registered. Once confirmed, investors should verify whether the person they are dealing with is the actual person by using information obtained from independent sources. For example, investors should contact the seller using a phone number or website listed in the firm’s Client Relationship Summary (Form CRS) – rather than relying on contact information the scammer provides. 

Investors can also visit FINRA’s BrokerCheck (here), a free online tool, to obtain information on brokers, investment advisers, and registered investment firms. As with, investors should pay attention to any inconsistences between what the investor is told and what is displayed in BrokerCheck. 

2.  Look for Red Flags.             

“A red flag is a warning or indicator, suggesting that there is a potential problem or threat with a company’s stock, financial statements, or news reports. Red flags may be any undesirable characteristic that stands out to an analyst or investor.” See here.

“Red flags tend to vary.” Id. However, there are several red flags that are common to investment scams. These include:

  • Guaranteed High Investment Returns. Scammers typically promise high investment returns, “often accompanied by a guarantee of little or no risk”. As noted by the OIEA, such promises are “classic sign[s] of fraud.” With investing, there are no guarantees; every investment has risk. 
  • Offers that Seem “Too Good to Be True. Investments offering returns that seem “too good to be true” are often “too good to be true.” Such offers, which are typically made through cold calls, are also a tell-tale sign of fraud. 
  • Payment Methods for Investments.
    • Credit Cards. Most licensed and registered investment firms do not allow their customers to use credit cards to invest.
    • Digital Asset Wallets and “Cryptocurrencies.” Licensed and registered financial firms typically do not require their customers to use digital asset wallets or digital assets, including “cryptocurrencies,” to invest.
    • Wire Transfers and Checks. Investors who pay for an investment by wire transfer or check, should be suspicious if they are asked to send, or to make, the payment to an individual or to a different firm, the address is suspicious (for example, an online search for the address suggests it is not an office building where the firm operates), or told to note that the payment is for a purpose unrelated to the investment (for example, medical expenses or a loan to a family member). The OIEA warned that sending money overseas carries additional risk because if the investment turns out to be a scam, the investor is unlikely to “see [the] money again.” 

The OIEA issued the Alert on the same day as a similar FINRA alert (here) about fraudsters impersonating brokers and fake SEC or FINRA registration documents.

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