We encourage all investors to thoroughly investigate any
investment opportunity and the person promoting it before
you part with your money—especially if you are a non-U.S.
investor seeking to invest in U.S. stocks. This is particularly
important if you learn about the investment on the Internet or
hear about it over the telephone from a broker you don’t know.
The recent globalization of world financial markets and
the strength of the U.S. securities markets have fueled a strong
demand by foreign investors for U.S. stocks. But this increased
appetite has, in turn, spawned new types of fraud. This alert
describes how some of these scams work, provides tips on how to
avoid them, and tells you where to find help.
WHAT THE FRAUDS LOOK LIKE
Many of the new frauds target investors worldwide who
purchase "microcap" stocks, the low-priced and thinly
traded stocks issued by the smallest of U.S. companies. If the
stock price falls, the fraudsters swoop in, falsely claiming
that they can help investors recover their losses—for a
substantial fee disguised as some type of tax, deposit, or
refundable insurance bond. Here’s how
some of the most common schemes work:
Dishonest brokers purchase blocks of stock from U.S.
issuers at a discount. They then use high-pressure sales tactics
to persuade non-U.S. investors to buy, often at inflated prices.
Once the brokers have finished selling the stock, the price
collapses with investors vulnerable to substantial losses.
For many investors, the scam ends here. When they
attempt to contact the individuals who sold the worthless stock,
the investors discover that the brokers have disappeared.
Advanced Fee Schemes—
For other investors, the fraud takes on a new twist.
Fraudsters posing as legitimate U.S. brokers or firms offer to
help the investors recover their losses by exchanging the
worthless stock for an established, blue chip stock or by
purchasing the stock outright. But investors must first pay an
upfront security deposit or post an insurance or performance
Further Demands for Money
As long as an investor appears willing to make
payments, the fraudsters will keep asking for more, falsely
claiming that the payments will cover fees, taxes, bonds for the
courier service, or other similar expenses.
HOW TO AVOID GETTING BURNED
Ask tough questions about the opportunity and the people
promoting it before you invest.
Are the Broker and the Firm
Contact your securities regulator to find out. The
International Organization of Securities Commissioners (IOSCO)
provides contact information for most securities regulators.
Be sure to ask whether the broker or the firm has a history of
complaints. If the person claims to work with a U.S. brokerage
firm, visit FINRA.
Is the Investment Registered with
Check the SEC's EDGAR
database to find out. But always remember the fact
that a company has registered its securities or has filed with
the SEC doesn't guarantee that the company will be a good
investment. Also, the fact that a company hasn't registered
doesn't mean the company is a fraud.
Where Does the Stock Trade?
Many frauds involve microcap companies whose stocks
are quoted in the pink sheets or on the OTC Bulletin Board.
These companies generally do not meet the minimum listing
requirements for trading on a national exchange, such as the
New York Stock Exchange or the Nasdaq Stock Market. Companies
quoted in the pink sheets generally do not file reports or
audited financial statements with the SEC. It can be very
difficult for investors to find reliable, unbiased information
about microcap companies.
What Is the Stock Price in the U.S.?
Before you purchase any U.S. stock, be sure to
independently confirm its current U.S. trading price.
Dishonest brokers may charge you a much higher price, assuming
that you’ll never check.
How Can I Independently Research This
Always ask to see written information about the
company, including a prospectus and recent financial
statements. Be sure to research the company on your own.
Look Past the Name
Some fraudsters illicitly use the names of
legitimate brokers and brokerage firms. Be sure to compare any
address a broker gives you with the address you obtain from
your securities regulator or the FINRA.
If they are not the same, you may be dealing with a fraudster.
Independently Verify References
Be Wary of Unusual Banking
Never rely solely on the references given to you by a
broker you’ve never worked with before. The satisfied
clients or international organizations they suggest you
contact may well be part of the scam.
Most reputable brokerage firms in the U.S. use U.S.
banks and would not, for example, ask you to transfer money to
a U.S. bank for further credit to a non-U.S. bank.