Firm Identity Protection
FINRA has created this page to educate member firms on “Firm Identity Theft”. The page offers information on
- Fraud techniques used;
- Fraud prevention tips;
- Actions to take in the event of a fraud and
- Resources to consult for more information.
Over the past few years, there has been a steady increase in the number of incidents where a person or firm fraudulently uses the identity of a legitimate registered representative or brokerage firm to con investors out of their money.
Here’s how it works: The fraudsters identify a legitimate broker-dealer or registered representative and build professional-looking websites that mirror the sites of the legitimate broker-dealer or registered representative. The fictional online entity claims to be registered with FINRA and SIPC (some will even encourage investors to research them on FINRA’s BrokerCheck or SIPC’s website). Once investors are convinced of the authenticity of the fraudulent website, they are induced into making payments or investments through the site. The fraudsters then collect the investors’ money and disappear.
Fraud Techniques Used to Build Investor Confidence
There are several tricks these fraudsters use to convince investors of their legitimacy and earn investor trust:
- As noted earlier, the scammers often obtain legitimate CRD numbers, which they provide to the investor. The investor is told to “check them out” on FINRA’s BrokerCheck. They may even alter or create fake BrokerCheck reports and send them to the investor. The scammers also encourage investors to look them up on the SIPC membership database to prove that they are genuine. This confidence-building measure leads the investor to believe they are dealing with a verified, legitimate U.S. broker-dealer or registered representative rather than someone mirroring a professional identity.
- The fake entity may create “official” looking letterhead and printed materials, using the firm’s brand and logos. The fraudsters may use the names of true regulators and stock exchanges, including the SEC, FINRA and NASDAQ, in an effort to lend credibility to their schemes. They may even create fake letters from regulators, using official looking seals and important sounding names.
- The fake entity websites and materials tend to use the same address as the legitimate FINRA member, but provide a different phone number, generally from the same area code as the true member.
- Sometimes, the fake firm will advertise or place links next to the actual firm’s legitimate advertisements, giving the appearance that the fake website is affiliated with or has the approval of the true firm. They will also use the same key search words that the legitimate firm uses and pay search-engine sites to tie their advertisements to the legitimate firm. This has resulted in some firms unwittingly paying to advertise on sites or next to links leading to sites that are promoting stock fraud.
Advanced Fee Schemes
A common Firm Identity Theft scheme that targets international investors is the “advance fee scheme” or “mirror fraud.” Under this scheme, a fraudster uses the identity of a legitimate broker-dealer and contacts an investor with a “too-good-to-be-true” offer. For example, the fake broker-dealer may offer to lift a stock restriction or to purchase the investor’s shares for an amount significantly above their market value. In return, the investor is asked to pay certain fees and expenses in advance. Once the investor has paid the fees, the fake broker-dealer steals the money and disappears.
Fraudsters typically use the advance fee schemes to target English-speaking investors in countries such as Australia, New Zealand, Singapore, China, and South Africa, though investors from areas such as northern Europe also appear to have been affected. These scams are difficult to pursue as they span numerous countries and jurisdictions. Therefore, education is a key tool in combating this fraud. U.S. and overseas regulators have extensive online material to assist investors in recognizing these schemes (see links below).
Fraudulent Check Schemes
Another type of Firm Identity Theft scheme involves the use of fraudulent checks. Again, under such a scheme the fraudster steals the identity of a legitimate broker-dealer. Under the guise of this stolen identity, the fake broker-dealer contacts a “customer” with a lucrative offer, one that does not typically involve securities. For example, the fraudster may offer to purchase an item listed on Craigslist for a very appealing price. The fraudster will mail the customer a check for well above the asking price and then claim that the excess amount on the check was written in error.
The customer is instructed to deposit the check in his or her personal account, keep the prearranged amount, and wire money or write a check for the difference from his or her personal checking account to a bank account established by the fraudster. In an effort to convince the customer of the stolen identity, the fraudster will use the broker-dealer’s true address as the return address on the mail sent to the customer. Believing they are dealing with a real broker-dealer, the customer is persuaded to send money.
Fraudsters take advantage of U.S. regulations regarding checks in their scam. U.S. regulations require banks to release funds from a customer’s deposit typically within one to five business days. In practice it may take longer for a bank to discover that a check is fraudulent, by which time the fraudsters usually disappears with the customer’s money. Customers do not realize that they are scammed until after they have already paid the fraudster and the fraudsters’ check has bounced.
Here are some steps broker-dealers and registered representatives can take to protect their professional identities.
- Periodically use internet search engines to seek out websites using the name of your broker-dealer or your name as a registered representative. Typically the fraudsters target broker-dealers and registered representatives who do not have a web presence, though the identities of larger firms and those with a web presence have also been used. For firms, the names used by the scammers often vary slightly from the actual name of a broker-dealer, therefore internet searches should consider this variance. For example, if the name of your firm is John Investments, vary the spelling of your name such as Jon Investments.
- Periodically review lists of unlicensed cold-calling firms maintained by international regulators. Broker-dealers or registered representatives may notice a firm or person whose name closely resembles theirs.
- In the case of advance fee schemes, be alert for unexpected paperwork received from overseas investors. Broker-dealers and registered representatives have become aware of the use of their professional identities upon receiving a signed power of attorney, new account form, transfer authorization form or other materials from overseas investors.
- In the case of advance fee schemes, be alert for phone calls, often late at night or early in the morning, from overseas investors discussing transactions that are unfamiliar to the broker-dealer or its registered representatives. Phone call complaints have also been the first indication of trouble to a broker-dealer or a registered representative.
- In the case of fraudulent check schemes, be alert for phone calls or correspondence from persons regarding non-securities transactions or arrangements.
- Test and review your advertisements on search-engines to ensure that they are not placed next to links that potentially promote stock fraud or appear to be illegitimate.
In the Event of a Fraud
If a firm or a registered representative believes that their professional identity is being employed in a scam, they should:
- Immediately contact the SEC and FINRA
- File a regulatory tip with FINRA
- Report to the FBI
- Contact the state regulator
- Lodge a complaint at www.ftc.gov.
- If the case involves email solicitation or spoofing, forward the email to firstname.lastname@example.org.
A broker-dealer or registered representative should encourage an overseas investor impacted by such scams to contact their home country’s securities regulator. Information on country securities regulators can be found with the International Organization of Securities Commissioners (IOSCO). Investors should also be encouraged to file a complaint with the SEC and FINRA.
Resources for Firms
News Releases, Studies and Speeches
- NASD Issues Alert on Financial Scams Targeting Non-U.S. Investors
- Well-Traveled Fraud—Advance-Fee Scams Target Non-U.S. Investors Using Fake Regulator websites and False Broker Identities
- Financial Fraud and Fraud Susceptibility in the United States, Research Report From a 2012 National Survey
- International Organization of Securities Commissioners (IOSCO)
- SIPC Issues Warning About Web-based “Brokerage Identity Theft” Scams Targeting Investors
- Fake Seals and Phony Numbers: How Fraudsters Try to Look Legit
- The Fleecing of Foreign Investors: Avoid Getting Burned by "Hot" U.S. Stocks
- NASAA Warns Investors to Beware of Phantom Regulators
- Worthless Stock: How to Avoid Doubling Your Losses