FINRA Issues Guidance on Avoiding Investment Scams
The Financial Industry Regulatory Authority ("FINRA") recently issued an Investor Alert (the "Alert") to warn investors about the most prevalent types of investment fraud and provide guidance on how to avoid being defrauded. According to the Alert, the five (5) most common fraudulent investment schemes tend to fall into the following general categories:

Pyramid Scheme: A fraudulent ploy in which a small investment is promised to yield large profits within a short period in time, but, in reality, investors only make money if they successfully recruit new investors into the program. Typically, fraudsters will invest a great deal of time and effort to make the scheme appear legitimate, but it inevitably fails once it becomes impossible to recruit new participants.

Ponzi Scheme: A central fraudster, or ring leader, collects money from new investors and uses it to pay purported returns to the original or earlier-stage investors. Because money simply passes between investors, it is never invested or managed as promised, and thus never allowed the opportunity to yield profits for investors. Pyramid schemes generally collapse once the ring leader can no longer attract new participants or too many participants want to take their money out at one time, i.e. during a down economy.

Pump-and-Dump: A scheme in which a fraudster buys a large amount of cheap, thinly traded stock then circulates false information regarding its desirability, thereby increasing interest and the stock's price. Once the price of the stock has risen significantly, the fraudster dumps his original investment and disappears with his profits, leaving the other investors with worthless stock. In the past, Pump-and-Dump schemes were usually carried out through cold calls, although emails and text messages are now the most common means for executing these schemes.

Advance Fee Fraud: This trick takes advantage of an unassuming investor's desire to recover losses on a previous investment mistake. Generally, a fraudster will offer to pay an attractive price for undesirable stock in an investor's portfolio. However, to consummate the deal, the investor must send an "advance fee" for the purchase. The fraudster never goes through with the purchase and instead makes off with the fee, leaving the investor out several hundreds, or even thousands, of dollars and still holding the worthless stock he had hoped to sell.

Offshore Scam: A scam in which investors in the United States are targeted by international scam artists. These scams take many forms, including those listed above, and often involve "Regulation S," which exempts U.S. companies from registering securities with the Securities and Exchange Commission ("SEC") if their stock is sold exclusively outside the United States. Fraudsters delude the exemption by reselling Reg. S stock to U.S. investors, and because the stock is unregistered, it is difficult for law enforcement to track, investigate, or rectify the harm.

Despite the scheme utilized, fraudsters are undeniably masters of manipulation and catch countless investors off guard every year. To avoid falling victim to their scams, FINRA warns in the Alert to be wary of investment pitches involving, among other red flags, (1) guaranteed profits, (2) unregistered products, (3) overly consistent returns, and (4) aggressive sales tactics. To protect yourself, always ask whether the promoter is licensed to sell you the investment he or she is promoting and confirm which regulator issued the promoter's license. A legitimate promoter must be licensed to sell securities-either with FINRA, the SEC, or a state securities regulator-depending on the type of business and investment product he or she promotes and/or trades. For a FINRA broker, be sure to independently verify his registration through a FINRA BrokerCheck, available for free on FINRA's website. Additionally, inquire into the investment product's registration. Typically, the safest investments will be registered with either the SEC or a state securities regulator. Products registered with the SEC can be independently verified through the EDGAR database. For more information, contact: Mignon A. Lunsford, in Mobile at (251) 345-8214 or Or a member of Burr & Forman LLP's Commercial Litigation Group.
Posted in: FINRA
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