April 28, 2020 – The COVID-19 pandemic created an environment in which fraud thrives. People are self-isolating at home, economic and market volatility around the world, widespread job losses, and other stressors. These factors leave people with uncertainty, vulnerability, and fear. Fraudsters are taking advantage of these negative feelings and use them to manipulate their victims. The warning bells are ringing from regulators, law enforcement agencies, and consumer organizations regarding investment scams that try to get a hold on investors’ hard-earned money. Be aware of the current most reported investment frauds.
The FINRA Investor Education Foundation, the BBB Institute for Marketplace Trust, Stanford Center on Longevity and Federal Trade Commission found in their study ‘Exposed To Scams: What Separates Victims From Non-Victims?’ that the key risk factors for susceptibility to scams and losing money are social or physical isolation from others, active online engagement, and financial vulnerability. Due to the COVID-19 pandemic, most people check the majority of these boxes while self-isolating. Since investors are more vulnerable and scammers are taking advantage of the crisis, the warning bells are ringing from regulators, law enforcement agencies, and consumer organizations regarding investment scams that try to get a hold on investors’ hard-earned money.
Coronavirus-related investment scams
The Ontario Securities Commission (OSC), in partnership with the Royal Canadian Mounted Police (RCMP) – Integrated Market Enforcement Team (IMET) issued a warning about fraudulent investment opportunities related to the Coronavirus and recommended investors to be cautious when investing. The current scams related to the virus are soliciting ‘hot new stocks’ claiming to be able to prevent, treat, or cure the disease.
The Canadian Securities administrators (CSA) state in their warning that investors are often lured with the expectation of significant returns and point out that investors should always do their own research. The CSA advises to ‘[b]e cautious of any claims that a company has a solution to help stop the coronavirus outbreak. Reliable information relating to COVID-19 is available from the World Health Organization and the Government of Canada.’
One example is actor Keith Lawrence Middlebrook. The FBI arrested the Southern-Californian man last month for allegedly soliciting investments for a company that claims to have developed a cure as well as a pill to prevent the infection with the virus. Middlebrook is now facing wire fraud charges.
Read more: Toronto police make COVID-19 fraud arrest
Investors are encouraged to be vigilant when it comes to Coronavirus related investment opportunities. Officials advise that at this time, there is no vaccine, natural health product, or other cure authorized to treat or protect against COVID-19.
One of the most common types of investment frauds is the pump-and-dump scheme. The global pandemic, which is creating daily breaking news, helps rogues to build on the hype to convince potential investors of the alleged significant returns they could earn.
Usually, publicly-traded small ‘shell’ companies are used in pump-and-dump schemes. For these microcap stocks, there is little information publicly available, which makes it difficult for investors to verify the information provided by the promoters or the company. At the moment pump-and-dump schemes could include promoting a company that is developing unverified products or methods related to COVID-19 preying on the uncertainty around the novel virus.
In a pump-and-dump scheme, fraudsters artificially promote and inflate the price of their stock at first. They do that using various internet promotions such as press releases, social media, pop-up ads, and emails about so-called ‘research reports’.
Using the word ‘research’ contributes to the simulated verification and legitimacy of the given information about the phony stock and its target price. The scammers do all this to ‘pump’ up the investment to get more people to buy in and create demand for their stock.
This first promotional phase follows the ‘dump’ of the stock before the hype ends. That leads to a substantial payout for the scammers while all remaining investors lose their money.
Pump-and-dump schemes are handled as high-risk investments by fraud experts. This type of investment scam is very likely to occur and will have an immediate impact on someone’s portfolio.
Aggressive stock promotions
Most investment scammers use aggressive-stock promotion techniques through unsolicited email, social media, or mail to entice investors to buy their stocks. They create an urgency to invest in order to create a fear of missing out, they promise investors extraordinary gains when the stock projections are really unfounded, they fake legitimacy and unique opportunities to persuade investors.
A recent Coronavirus-related investment scam involved third-party promoters who sent out a mailing to residents of British Columbia, Alberta, Manitoba, Saskatchewan, and Ontario. The letter urged the recipient to invest in the B.C. gold mining company, Crestview Exploartion Inc.
The British Columbia Securities Commission (BCSC) and the Alberta Securities Commission (ASC) reminded investors to ‘exercise caution when considering aggressive promotions as a basis for investment decisions, as these promotions may make false claims of large profits and baseless stock price projections.’
Forex trading job scams or work from home scams
During the crisis, more Canadians are looking for alternative sources of income due to layoffs or bad order situation related to the global pandemic. The BCSC and the ASC alerted people who are job hunting to be skeptical towards companies offering opportunities to work from home as a trader in the financial markets during this time of crisis.
The commission discovered potentially fraudulent ads claiming that traders can keep a large percentage of the profits and do not need any experience or a license. Furthermore, the ads offer to train the job seeker on trading stocks or forex. These ads demand payment of fees from their would-be traders. However, once the fees are paid the firms disappear with the money.
The BCSC warns against these ‘job offers’ which are actually job scams and explains that ‘[i]n Canada, anyone in the business of trading securities must be registered with the securities regulator in each province or territory where they do business, unless an exemption applies.’
The authorities all advise that when investing in any company, investors should carefully research the investment and keep in mind that fraudsters often exploit the latest crisis. Accordingly, investors should remain vigilant and be cautious of ‘investment opportunities’ tied to COVID-19, especially those based on claims that a small company’s products or services can help stop the virus.
If an investment opportunity connected to COVID-19 comes across, investors should make sure to only use reputable sources while researching the company and any claim. In the case of suspected fraud or misconduct, investors are encouraged to report the incident to the securities regulator.
Marina Burghard writes for Canadian Fraud News about fraud-related cases, whistleblower, jurisdiction, identity theft, consumer protection, etc. – essentially about scams and how to protect yourself against this kind of fraudulent criminal behavior. She holds a Master’s degree in Political Science where her interest in criminology grew. Besides fraud, Marina’s scientific interest lies in terrorism, extremism and how to deal with it as a society.