The warning bells are ringing. From regulators, law enforcement agencies, and consumer organizations around the globe, the message is clear: fraudulent schemes related to the coronavirus (COVID-19) pandemic have arrived, and they are coming in many forms, from investment fraud to fake CDC emails to phishing scams. And unfortunately, efforts to stop the spread of the virus may put investors in a precarious position when it comes to avoiding fraud.
Job loss, financial strain and social distancing are conditions that present fraudsters with an opportunity to pounce. A study by the FINRA Investor Education Foundation, the BBB Institute for Marketplace Trust, Stanford Center on Longevity and Federal Trade Commission found that key risk factors for susceptibility to scams and losing money are social or physical isolation from others, active online engagement, and financial vulnerability.
In times like these, it can be difficult to separate fact from fiction. We are feeling strong emotions, are isolating for physical safety, and are uncertain what news may come tomorrow. So now is the time to move slowly, pay attention to details, and not make rash decisions. Be on the lookout for coronavirus investment scams and follow these tips to keep your money and personal information safe.
Coronavirus Investment Scams
FINRA has warned in the past that dramatic news coverage of viral outbreaks and pandemics can be an opportunity for scammers to pump inaccurate information into the marketplace to try to manipulate markets and investors. The coronavirus is no exception.
A recent Investor Alert from the SEC's Office of Investor Education and Advocacy warns of Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result. The alert cautions that these promotions often take the form of so-called "research reports" and make predictions of a specific "target price," and urges investors to be wary of these promotions and to be aware of the substantial potential for fraud at this time.
Promotions of this type are the hallmark of a typical "pump-and-dump" scheme, in which investors are lured with aggressive and optimistic statements through press releases, social media, pop-up ads, emails and other promotions intended to create demand for a companies' stock (the pump). Once the share price and volume spike, the cons behind the scam sell off their shares at a profit, leaving investors with worthless, or near-worthless, stock (the dump).
Microcap stocks for which there is little publicly available information are often the subject of pump-and-dump scams because it is difficult for investors to verify the information provided by promoters or the company.
A recent coronavirus scam that resulted in a trading suspension by the SEC involved third-party promoters without any affiliation with the issuer. These promoters used message boards, banner ads on websites, and pop-up ads to tout the efficacy of the company's product against the coronavirus. The chatter around the company corresponded with increased trading activity in the stock. Another recent SEC trading suspension involved concerns about the adequacy and reliability of publicly available information about, among other things, a company's purported international marketing rights to an approved coronavirus treatment. The SEC also expressed concerns regarding certain disclosures by the company regarding their issued and outstanding shares, and corresponding increased market activity in the stock.
Tips for Avoiding Coronavirus Scams
- Ask and Check. In other words, do your research. Before you make any investment decision, ask and check to verify information about any individuals you are dealing with and any investment product you are considering. You can use FINRA BrokerCheck, a free online tool to get information on brokers and investment advisers. And remember, when you invest in a company that is the subject of inaccurate or unreliable claims, it will cost you, and you may be stuck with your shares if trading in the company is suspended.
- Be skeptical. If an unknown company becomes the subject of press releases, emails and promotional materials hyping the company and its products to cure the latest pandemic, hit pause. Potentially fraudulent companies and their promoters often make exaggerated claims about lucrative contracts or acquisitions, patent-pending technology, potential revenues, profits or future stock price. Be wary if you are flooded with information over a short period of time, especially if the communications only focus on a stock's upside with little or no mention of risk.
- Read a company's SEC filings. Most public companies file reports with the Securities and Exchange Commission (SEC). Check the SEC's EDGAR database to find out whether the company files with the SEC. Verify these reports against promotional information put out by the company or against information that third-party promoters have sent out. Exercise caution if they don't align. Also, be suspicious of solicitations to invest when products are still in the development stage, but where no actual products are on the market, or if the company's balance sheets only show losses.
- Question companies new to the "cure" market. Changes to the name or business focus of a company may be a sign that a company is engaged in, or the subject of, a potential fraud. These changes can turn up in company press releases, Internet searches and, if the company files periodic reports, in the SEC's EDGAR database. Watch out for companies that change their names or tout new disease-prevention product lines following extensive media coverage about a viral disease pandemic.
- Run it through the Scam Meter. We've all heard the timeless warning "If it sounds too good to be true, it probably is." It's great advice, but the trick is figuring out when "good" becomes "too good." While there's no clear way to know, in addition to applying the four scam tips above before you make any investment decision, our Scam Meter can help you tell if an investment you are thinking about might be a scam.
If you're suspicious about an offer or if you think the claims might be exaggerated or misleading, please contact us. If you suspect that you or someone you know has been taken in by a scam, send a tip to FINRA or file a complaint.
Where to Find Reliable Information about the Coronavirus
We are all in information overload with news about the latest on the coronavirus and its global and market impacts. It pays to know where to look for accurate, unbiased information. Here are a few resources you might find helpful.
- FINRA: FINRA's COVID-19/Coronavirus page provides guidance, updates and other information to help stakeholders stay informed about the latest developments.
- Securities and Exchange Commission: The SEC Coronavirus (COVID-19) Response page offers updated information on its response to COVID-19 and the related effects on our securities markets.
- Commodity Futures Trading Commission: The CFTC has a dedicated webpage to highlight the Commission's actions related to COVID-19.
- Federal Trade Commission: The FTC's page: Coronavirus Scams: What the FTC Is Doing provides helpful tips to avoid coronavirus scams and updates on how the FTC is responding to the pandemic.
- Consumer Financial Protection Bureau: The CFPB offers consumers up-to-date information and resources to protect and manage their finances at: Protecting your finances during the Coronavirus Pandemic.
- North American Securities Administrators Association: NASAA has an investor-focused page that reminds investors to beware of con artists looking to profit from fear and uncertainty and has established a resource page to collect COVID-19-related updates from state and provincial securities regulators.
- Better Business Bureau: The BBB provides tips to be safe and avoid scams at: BBB Tips on COVID-19 (Coronavirus).
- Federal Bureau of Investigation: The FBI released a public service announcement that cautions that scammers are on the prowl to steal your money, your personal information, or both.
- Centers for Disease Control and Prevention: The CDC and www.coronavirus.gov have extensive guidance and information updated frequently.