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Protecting Against Investment Scams on the Internet


Almost as soon as investment opportunities hit the Internet, so, too, did investment scams. And from the traditional pump-and-dump schemes to cryptocurrency frauds, investment scams show little sign of abating.

While the internet is a convenient platform to communicate with investment sources and investigate opportunities, it remains a popular place for thieves and scam artists to find victims:

  • Emails promoting investment ideas can be sent to millions of people very cheaply instead of cold calling over the phone or using regular mail.
  • Fraudsters can lure investors by building websites trying to promote a stock with "inside" or "secret" information about a company's results or new products.
  • Investment newsletters claiming to provide honest and unbiased advice have become popular as illegal vehicles for some promoters to hype specific stocks.

With new technology platforms providing attractive returns in legitimate stock markets, scammers have emerged promising early access to the next big thing in tech. Some investors, caught by a desire to make a quick killing, forward funds without the proper due diligence.

And scammers have become more sophisticated, often setting up elaborate websites or fake trading platforms that report false gains before supposedly trading reversals empty the account – taking the original investment as well as the phantom profits.

Financial fraud is lucrative not only for the large amounts of money involved, but also the fact that many victims are reluctant to report fraud because they’re embarrassed that they got taken in by the scam. 

Using the Internet Wisely

It is always important to get the facts before making any investment:

  • Never make an investment only based on what you may have read in an online newsletter or from an online bulletin board posting.
  • Be very wary of small or very thinly traded stocks you read about on the Internet.
  • Beware of companies that do not file regular reports with the Securities and Exchange Commission.
  • Check that your supposed investor advisor has a license, and does not have a history of disciplinary problems.
  • Be wary of offshore investment ideas, especially if they involve some form of tax avoidance.
  • Do not be lured by promises of high returns with no risk or very little risk.
  • Be wary of ideas that promise fast returns.
  • Be wary of opportunities in alternative investments like commodities, real estate, coins, artwork, or gemstones.
  • If you see words like "guarantee, high return, limited offer or safe as a CD", be very careful.

Common Types of Internet Investment Scams

The Securities and Exchange Commission reports that most Internet scams follow the same formats that have been around for years. Here is a portion of an article from the SEC's website:

The "Pump and Dump" Scam

It's common to see messages posted online that urge readers to buy a stock quickly or tell you to sell before the price goes down. Often the writers will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it's easier to manipulate a stock when there's little or no information available about the company.

Cryptocurrency Offerings

As a new asset class, cryptocurrency offers new legitimate investment opportunities as well as scams. Because most investors don’t understand the technical underpinnings of cryptocurrencies, it’s easy for people to be taken in by complex jargon and the often-false promise of attractive returns.

The "Risk-Free" Fraud

"Exciting, Low-Risk Investment Opportunities" to participate in exotic-sounding investments - such as wireless cable projects, prime bank securities, and eel farms - have been offered through the Internet. But no investment is risk-free. And sometimes the investment products touted do not even exist - they're merely scams. Be wary of opportunities that promise spectacular profits or "guaranteed" returns. If the deal sounds too good to be true, then it probably is.

Off-shore Frauds

At one time, off-shore schemes targeting U.S. investors cost a great deal of money and were difficult to carry out. Conflicting time zones, differing currencies, and the high costs of international telephone calls and overnight mailings made it difficult for fraudsters to prey on U.S. residents. But the Internet has removed those obstacles. Be extra careful when considering any investment opportunity that comes from another country, because it's difficult for U.S. law enforcement agencies to investigate and prosecute foreign frauds.

Skepticism and common sense should play large roles in evaluating investment ideas found on the Internet.

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This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, before making any decisions related to these matters, you should consult a qualified professional advisor.