In the wake of the terrorist attacks of 9/11, a little-known medical company based in Florida won an exclusive contract to provide emergency medical supplies to a battered New York City. Investors who heard about the deal were naturally quick to jump in.
“They raised $3 million in 48 hours,” recalls Joseph Borg.
There was only one problem: The deal didn’t exist.
Neither did the company.
Borg was among those who helped shut down that fraudulent investment scheme. He’s now head of the Alabama Securities Commission and Enforcement Chair of the North American Securities Administrators Association (NASAA). And he’s bracing for another wave of fraud, this time linked to the coronavirus.
NASAA warned on March 30 that it anticipates a “surge” in investment fraud. The Commodities Futures Trading Commission recently warned that “fraudsters commonly use major news events…to add credibility to their cons or manipulate emotions.”
“When you have a panic situation, when you have situations changing, fraudsters are very, very adaptable,” says Liz Lasher, vice president for fraud at FICO.
“They see opportunity.”
Yes, you are a target
It may be tempting to think that investment fraud mainly exploits less-savvy investors. But Borg is quick to squash that idea.
“The biggest scams are against those with above-average intelligence, usually college degrees,” says Borg. “The problem is, if they know a little bit about something, they think they know more than they do.”
For example, Borg says that attempts to sell a fraudulent tech stock are most likely to target those already knowledgeable about tech, or even those working in the industry. Scammers, just like political campaigns and mainstream marketers, can now buy contact lists that group potential victims by geography, profession, and other characteristics, then tailor their pitch to the targets.
More educated investors are also more likely to be targets for one simple reason: They’re the ones who have both assets and cash. Given the dramatic selloff in stock markets in recent weeks, they may be looking to either take big risks to make up their losses, or find a “safe haven” to guard their wealth during a downturn.
The can’t-miss opportunity: oil, masks, sanitizer, vaccines
By the same token, investment scams often capitalize on what can seem like savvy investment strategies. Borg warns, for instance, that scammers are likely to take advantage of current conditions in the energy market, where oil prices have hit a dramatic low.
He imagines a pitch that sounds all too compelling: “It can’t stay this low that long. Let’s buy these oil well stocks right now. In a year it’s guaranteed to go up.”
The catch? “I’m selling you phony oil wells,” says Borg. “You have no way of knowing whether they exist or not. I’ll just make a nice glossy brochure.”
Similarly, he says, scammers are likely to pitch garment companies pivoting to make protective equipment, liquor distillers producing hand sanitizer, or medical companies supposedly on the verge of new treatments. But these claims will in many cases amount to nothing but thin air.
“If I were to convince you that my sand and gravel pit in Alabama has found a chemical that can treat COVID-19,” Borg says, “I just sold you a sand and gravel pit.”
In some cases, grifters will sell “private placement” opportunities in these supposedly innovative companies, then simply walk away with the cash. In other cases they’ll misrepresent penny stocks they hold to pump up their open-market value, then dump their own holdings, collapsing the price and leaving victims holding the bag.
“Safe havens”
Other cons are more tailored to those seeking security in times of financial turmoil. Borg says gold is persistently popular, but that pitches selling gold coins in particular should be avoided. Coins, he says, are often sold at a markup to the value of the metal they’re made from and can be illiquid, or hard to sell.
Joseph Peiffer, a lawyer who pursues financial fraud cases, warns that many investments pitched as safe havens can be a bad deal for investors, even if they’re legally aboveboard. He highlights variable annuities and indexed universal life policies as particularly risky, because they’re often sold by brokers making very high commissions and structured in ways that are hard to understand and often disadvantage investors. He recommends asking about the commission structure of any investment being aggressively marketed.
Certification
Borg says the surest way to avoid investment scams, during a crisis or more normal times, is to do basic due diligence and watch out for a few specific red flags.
Borg estimates that more than 90% of those involved in pitching investment scams are not licensed securities brokers. Before giving anyone money, he urges would-be investors to ask for a seller’s name and what’s known as a Central Registration Depository (CRD) number. Then check with either your state financial regulator or Brokercheck, a searchable registry of licensed brokers maintained by the Financial Industry Regulatory Authority (FINRA). The CFTC runs a similar registration check for commodities brokers. Licensed investment advisers are registered through the Investment Adviser Registration Depository, also run by FINRA.
Scammers may attempt to short-circuit that diligence. “They’re going to say, Oh, you don’t need a license, we’re exempt,” says Borg. “But there’s no such thing.”
Time pressure
A seller might also claim that the investor must act immediately, which Borg says is a red flag.
“Anytime somebody says, You gotta do it now; it’s going to be too late,” Borg warns, “ask yourself this question: Did I call this person, or did they call me? So they’re calling me and 100,000 of their closest friends for this secret deal?
“If it’s a good deal today,” cautions Borg, “it’ll be a good deal a few days from now.”
Another timeless warning sign of an investment scam is impossible promises, including phrases like “guaranteed returns” or “zero risk.” The CFTC’s recent warning states directly: “There is no such thing as a risk-free strategy.”
If you hear a promise that’s too good to be true, it almost certainly is.
Bad education
Another breed of investment scammer is also already on the hunt: self-styled gurus pitching penny-stock newsletters, investing seminars, and other educational products.
Tyrone Ross, a licensed investment advisor and financial consultant, says he has spotted a fresh wave of ads for financial education across platforms like Instagram, Twitter, and YouTube. Many of the sellers tout their expertise using terms that sound impressive but don’t actually designate any formal training.
“One of the ones I see all the time is ‘financial expert.’ I’m still trying to figure out what that is,” says Ross. “‘Financial counselor’ is another one. ‘Financial educator,’ ‘Financial coach.’ Throw ‘financial’ in front of it.”
While Ross grants that some unlicensed financial educators give solid advice—he cites Ramit Sethi as an example—he says they’re vastly outnumbered by self-promoters selling hokum. “You see a lot of the Goof Troop. They’re going to give people really bad advice.”
The most important red flag, Ross says, is if you’re being asked to pay for an educational product. Licensed financial professionals can’t charge for seminars or newsletters, instead making their living from ongoing clients.
“If they’re asking you for money, period, you already know what the issue is. No licensed person can do that.”
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