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Navigating the Investing Frontier: Where the Frauds Are
Many fraudsters rely on the telephone to carry out their investment scams. Using a technique known as cold calling (so-called because a caller telephones a person with whom they have not had previous contact), these fraudsters will hound you to buy stocks in small, unknown companies that are highly risky or, sometimes, part of a scam. In recent years, the Internet has also become increasingly attractive to fraudsters because it allows an individual or company to communicate with a large audience without spending a lot of time, effort, or money.
You should be skeptical of any offers you learn about from a cold caller or through the Internet. Here’s what you need to know about cold calling and Internet fraud.
Cold Calling
For many businesses, including securities firms, cold calling serves as a legitimate way to reach potential customers. Honest brokers use cold calling to find clients for the long term. They ask questions to understand your financial situation and investment goals before recommending that you buy anything.
Dishonest brokers use cold calling to find "quick hits." Some set up "boiler rooms" where high-pressure salespeople use banks of telephones to call as many potential investors as possible. Aggressive cold callers speak from persuasive scripts that include retorts for your every objection. As long as you stay on the phone, they’ll keep trying to sell. And they won’t let you get a word in edgewise.
Whether the calls are annoying, abusive, or downright crooked, you can stop cold callers. The law protects you by requiring cold callers to follow several rules.
When people from the securities industry call to sell something, they must:
- Call Only Between 8:00 a.m. and 9:00 p.m. These time restrictions do not apply if you are already a customer of the firm or you’ve given them permission to call you at other times. Cold callers may call you at work at any time.
- Say Who’s Calling and Why Cold callers must promptly tell you their name, their firm’s name, address, and telephone number, and that the purpose of the call is to sell you an investment.
- Put You on Their "Do-Not-Call" List, If You Ask Every securities firm must keep a "do-not-call" list. If you want to stop sales calls from a firm, tell the caller to put your name and telephone number on the firm’s "do-not-call" list. If you continue to receive calls from that firm, get the caller’s name and telephone number, note the date and time of the call, and complain to the firm’s compliance officer, the SEC, and your state securities regulator. At the end of this unit, you’ll find information on how to make a complaint.
- Treat You With Respect Cold callers can’t threaten or intimidate you or use obscene or profane language. They also can’t call you repeatedly to annoy, abuse, or harass you.
- Get Your Written Approval Before Taking Money Directly from Your Bank Accounts Before investing, you should always get answers to the questions below and written information about an investment. If you do decide to buy from a cold caller, do not give your checking or savings account numbers to the broker over the phone. Brokers must get your written permission-such as your signature on a check or an authorization form-before they can take money from your checking or savings account.
- Tell You the Truth People selling securities must tell you the truth. Brokers who lie to you about any important aspect of an investment opportunity violate federal and state securities laws.
To learn more about how to deal with cold calls, how to stop them, and how to evaluate any investment opportunity that comes your way over the telephone, read the SEC’s Cold Calling: Know Your Rights. You’ll find this brochure on the SEC’s Web site at www.sec.gov/investor/pubs/coldcall.htmor you can order it by calling the SEC’s toll-free investor assistance line at 1-800-SEC-0330.
Internet Fraud
The Internet serves as an excellent tool for investors, allowing them to easily and inexpensively research investment opportunities. But the Internet is also an excellent tool for fraudsters. That’s why you should always think twice before you invest your money in any opportunity you learn about through the Internet.
Anyone can reach tens of thousands of people by building an Internet Web site, posting a message on an online message board, entering a discussion in a live "chat" room, or sending mass e-mails. It’s easy for fraudsters to make their messages look real and credible. But it’s nearly impossible for investors to tell the difference between fact and fiction.
The most common methods for Internet investment scams are:
- Online Investment Newsletters Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors seemingly unbiased information free of charge about featured companies or recommend "stock picks of the month." While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud. Some companies pay cash or securities to people who write online newsletters in exchange for recommending their stocks. While touting isn’t illegal by itself, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they’ll lie about the payments they received, their independence, their so-called research, and their track records. These fraudsters usually stand to profit handsomely if they convince investors to buy or sell particular stocks.
- Online Message Boards Online message boards are an increasingly popular forum for investors to share information. Message boards typically feature "threads" of messages on various investment opportunities. While some messages may be true, many are bogus—or even scams. Fraudsters often pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts. Also, you never know for certain who you’re dealing with—or whether they’re credible—because many message boards allow users to hide their identity behind multiple aliases. People claiming to be unbiased observers who’ve carefully researched the company may actually be company insiders, large shareholders, or paid promoters. A single person can easily create the illusion of widespread interest in a small, thinly traded stock by posting a series of messages under various aliases.
- E-mail Spams "Spam" (junk e-mail) is so cheap and easy to create that fraudsters increasingly use it to find investors for bogus investment schemes or to spread false information about a company. Many more potential investors can be targeted with spam than with cold calling or mass mailing. Using a bulk e-mail program, spammers can send personalized messages to thousands and even millions of Internet users at a time.
For more information about how to protect yourself from Internet fraud, visit the Onguard Online Web site and review the materials on online investing, which are available at www.OnGuardOnline.gov/topics/on-line-investing.aspx.
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