The Commodity Futures Trading Commission (“CFTC”) has recently issued a warning to investors to be on the lookout for scams seeking to take advantage of recent COVID-19 related market volatility. The Securities and Exchange Commission (“SEC”) has also issued a recent warning to investors to be especially vigilant in investing in microcap stocks where brokers or promoters claim that a company’s products or services can help stop the coronavirus.
According to the SEC, fraudsters often use the latest news developments to lure investors into scams. There have been a number of recent Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus and that the stock of these companies will dramatically increase in value as a result. The promotions often take the form of so-called “research reports” and make predictions of a specific “target price.” The SEC urges investors to be wary of these promotions and to be aware of the substantial potential for fraud at this time
When it comes to options investing, recent market volatility may cause fraudsters to try to promote options or futures strategies to take advantage of this market. This too has special risks which investors should be aware of. It is true that some types of options do allow traders to hedge against market risk. For example, historically, gold futures and other precious metals have seen short-term increases in times of economic uncertainty. And, over-the-counter digital asset or foreign exchange (forex) traders may be able to identify pairings that go up in value when other markets are in decline.
However, the CFTC warns that there is no such thing as a risk-free strategy, and no person or program can guarantee future results. Also, you should know that all risks, fees, and expenses should be disclosed to the investor upfront.
According to the CFTC, here are things you should look out for:
If it Looks to Good to Be True, It Probably is
Trading and investing come with a number of biases and emotions that influence decision making. Recent market losses due to the impact of COVID-19 may motivate some traders to recoup losses, while others may seek safety. Fraudsters know this and design their pitches to appeal to these instincts. Examples include claims of special insider knowledge or insights, promises of unusually large returns, guarantees, surefire trading signals, or low costs to open accounts. And these offers are timed to hit your inbox or social media feed when you are most interested.
The common advice is “if it looks too good to be true, it probably is.” But frauds are often successful because they do look good. The problem, even for experienced traders, is that when biases get in the way, they make it difficult to recognize what’s too good.
Experienced Investors Can Often be Scammed
Numerous studies have revealed that those who are more financially literate and experienced are more likely to be victimized by investment fraud. It could be correlation: Those who are more financially literate are more likely to trade and therefore more likely to encounter fraud. Or, as some researchers believe, overconfidence could cause some traders to skip important due diligence.
According to the CFTC, these are fairly common fraud tactics:
1. Oversized returns. This is the “wow factor.” The promise of big money is often paired with guarantees or promises of little or no risk.
2. Urgency. Fraudsters commonly push traders to act now, before market conditions change. Fear of missing out is a strong motivator, which is why this tactic is used so often. Pressure to act quickly should signal you to tap the brakes. Verify what you’re told. Get it in writing. And, get opinions from others you trust.
3. Credibility building. Would you give your money to just anyone? No. That’s why fraudsters generally use vague, unverifiable credentials such as “hedge fund genius,” “trading legend,” or “advisor to the biggest firms on Wall Street.” Check to see if the individual is registered with the CFTC (for options or futures) or FINRA (for stockbrokers) or the SEC (for investment advisors).
4. Testimonials. Web platforms prominently display customer reviews. Social media pages show screenshots of happy customer statements showing hefty returns. These are also intended to gain your confidence by confirming other “real” people are doing this and succeeding, so it must be okay.
5. Reciprocity. Scams commonly offer a free gift in exchange for an email address. It could be a free demo, a free course or book, a few tokens, or other promises. However, once the fraudsters have the email address they go to work. The offers and asks get bigger and more frequent—until victims are bled dry.
If you believe you have been harmed because of stockbroker misconduct or fraud during the coronavirus pandemic, or have questions regarding any investment claim, contact our offices today for a free consultation. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers will evaluate your claim at no cost to you. We handle cases nationwide. Contact us by filling out our online contact form, or calling 888-768-2499.