Updated on 01.05.15

Old Hustle, New Tools: Social Media Investing Scams

Pump-and-dump isn't dead; it's thriving online.

Want to make a killing in the market? Who doesn't? But social media have made it easier for investing scam artists. Photo: Perpetual Tourist

Want to make a killing in the market? Who doesn’t? But be careful chasing hot stock tips — social media have made it easier than ever for investing scam artists to find their marks. Photo: Perpetual Tourist

“Psssst, over here,” croaked a voice from the shadows somewhere in the alley. “Are youse lookin’ for a hot tip on a cool stock?”

Rob looked over his shoulder and from side to side before pointing with his thumb at his own chest like a novice hitchhiker. The voice grew louder as its source, a shady-looking character straight out of a black-and-white gangster movie, stepped out from behind an overfilled dumpster.

“Sure, I’m talking to you” he hissed. “There’s money to be made by smart guys like you that’re willing to act fast and not ask a lotta questions.”

As implausible as this shadow-dwelling tipster may be, his modern-day counterparts are far less obvious and much more effective. The sketchy characters have left the confines of back alleys and dimly lit barrooms for the brightly illuminated world of social media.

As a rapidly expanding pool of retail investors scours sites like Facebook, LinkedIn, Twitter, and others in search of gaining an edge in their investment strategies, they have been followed by a new breed of more sophisticated tipsters, hucksters, and fraudsters.

Why Social Media?

The SEC’s Office of Investor Education and Advocacy finds the growing number of social-media-based scams so alarming that it issued an investor alert advising retail investors to beware of old hustles and cons dressed up in fancy new Internet attire.

The Internet in general, and social media in particular, provide many of the attributes that criminals find most desirable. Social media allow fraudsters to reach large audiences at a very low cost and — best of all for them — anonymously.

Scam artists can find and exploit individual marks through social media, as well as manipulate stock prices. Schemes to drive up the price of stocks and profit from the increase have been around forever.

Pump-and-dump scams relied on criminal enterprises organizing phone banks to make cold calls to lists of penny-stock investors tipping them off to an inexpensive stock. The unsuspecting investors were told the company was about to introduce a revolutionary new product or be bought out by a Fortune 500 company.

Once the price of the stock was pumped up, the gang would dump their shares at a hefty profit, leaving unsuspecting investors holding rapidly devaluing stock.

Spotting Fraud

We all know you should not reply to unsolicited emails with personal information or follow links in them asking for the same sort of information. Fraudsters still make use of unsolicited bulk emails, but are more likely to have gotten your name and email address directly from you rather than poaching them from friends and family through malware.

Building mailing lists through social media, fraudsters seek subscribers on the lookout for investment tips. They masquerade as legitimate members of investment discussion groups and regularly contribute regurgitated advice from real sources as a means of building credibility.

Identifying the bogus advice means looking out for red flags such as offers and tips that are “exclusive.” The reason they are exclusive is that they are often the object of pump-and-dump scams or “touting.” Touting a stock or investment in exchange for payment in the form of stock or cash is not illegal as long as it is disclosed that payment is part of the deal. Fraudsters will either omit the disclosure entirely or phrase it inconspicuously in the fine print.

Other words and phrases that should trigger your concern are “breakout,” “incredible gains,” and “inside information.” Compare the returns being promised with the legitimate market or sector indexes, and if the return being touted exceeds that, be suspicious. Grow more doubtful as the difference between the promise and indexes grows.

Watch for pressure to buy now before word gets out and never trust a “guaranteed return.” Honest investment advisors know there is always a risk in investing.

Fraud Alerts and Reporting

The Financial Industry Regulatory Authority has an investor’s alert page with links to information on current and past scams. The North American Securities Administrators Association also provides investor alerts and tips on its website. If you suspect you have been the victim of fraud or would like to file a tip or complaint with the SEC, visit its enforcement tips and complaints page.

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