The Financial Industry Regulatory Authority (FINRA) recently issued an investor alert warning about a spike in complaints stemming from fraudulent “investment groups” promoted on social media. Since November, FINRA has received a dozen complaints with millions in alleged losses.
This scam typically starts with promoters posing as registered investment advisors and advertising stock groups on Instagram. They then move discussions to encrypted WhatsApp chats and high-pressure investors to invest in a low-priced/low-volume U.S.- or Hong Kong-listed stock.
They instruct investors to open an account at a specific broker-dealer, then guide them on which stocks and how much to purchase and at what times and prices, essentially leading the investors to unwittingly manipulate the price of the securities upwards. At some point, the investors become unable to sell, and the price of the securities inevitably crashes.
For compliance professionals, this scam highlights the ongoing need to monitor social media for fraudulent activity tied to your firm or brokers. Even if no one at your firm is actually involved, the scammers create fake personas using real broker records and disciplinary histories. This allows them to falsely portray themselves as registered professionals affiliated with your company.
It’s critical for compliance departments to be aware of such scams and prepared to swiftly investigate and report any unauthorized use of their firm’s name or registered brokers’ identities. This protects both the firm and investors from being further exploited by these schemes.
Having robust social media policies and monitoring procedures in place can help compliance teams stay ahead of new scam tactics that exploit social platforms. This includes restricting registered representatives’ use of encrypted messaging apps like WhatsApp for business purposes.
Overall, the rise in social media investment scams reinforces the need for heightened vigilance from compliance leaders. As online platforms make it easier for fraudsters to reach investors, compliance will play a key role in detecting scams early and limiting the risks. Staying abreast of the latest FINRA alerts and investigating any links to your firm will remain imperative.
To read the complete Investor Alert, “Investor Alert: Social Media ‘Investment Group’ Imposter Scams on the Rise” click here.