• Find out how scammers use impersonation, misdirected texts and social media to build trust, then promote risky investments, often leading to pump-and-dump losses
• Learn to recognize red flags such as guaranteed returns, secrecy, urgency, advance fees and celebrity impersonation
• Understand prevention strategies like verifying sources, avoiding isolation, delaying decisions and reaching out to trusted contacts

Christine Kieffer is interim president of the FINRA Investor Education Foundation, a subsidiary of the Financial Industry Regulatory Authority (FINRA). Cynthia McLaughlin and I spoke to Kieffer about current investment scams and what investors can do to protect themselves.
—Charles Rotblut, CFA

Charles Rotblut (CR): Currently, what are the most common types of investment scams?

Christine Kieffer: Pretty much every scam, not just investment scams, involves impersonation. Broadly speaking, today’s scams are increasingly reliant on impersonation as a shortcut to trust. When scammers impersonate someone or something that you already want to have a relationship with, have knowledge of or have trust in, they create a shortcut to trust.

Investment-related scams are currently some of the most highly reported scams—which was not the case 10 years ago—and they certainly have the highest dollar losses. They often start within a relationship investment scheme.

I emphasize relationship because these scams are not just built on romance. In many cases, they start as a “misdirected” text. For example, you might receive a message from an unknown number asking, “Are you home?” Wanting to be nice, you might write that person back and ask who they are. Next thing you know, you are having a dialogue.

These misdirected texts are meant to 1) evade scam detection software because they sound so innocuous and 2) encourage engagement. At this stage, the scammers are gauging whether you’re someone who’s going to engage in conversation. Over the course of days, weeks and sometimes months, the scammers will start to form a friendly banter.

At some point, they will introduce investing or finance topics. For instance, they might mention their uncle who lives abroad and is really into trading foreign stocks, prompting you to express interest in investing and ask the person about the opportunities they’re hearing about. Then, the topic moves to trading. For example, the conversation could first move into general small-cap trading recommendations, which might lead to the scammer saying, “I’ll tell you which trades to make in your account. Then, you can send me a screen capture proving that you’ve made those trades, and we can follow along together.”

As you might suspect, those types of relationship investment schemes eventually morph into traditional pump-and-dump schemes. The scammers recommend some sort of small-cap investment—typically a foreign issuer—and it becomes a pump-and-dump. In a pump-and-dump scam, there’s hype going on behind the scenes and, in this case, there might be social media messaging to encourage hype around a particular issuer or series of issuers to pump up that stock price. Ultimately, the people behind the scheme who are already holding those particular investments sell at high prices, and investors are left holding stocks that are falling in value and are hard to sell.

At FINRA, we also see this pump-and-dump scam play out in social media investment club schemes. You might see an advertisement on social media for an investment group to get investment tips. In the case of the misdirected texts, you are brought into the scheme unbeknownst to you. But in the case of these investment club advertisements, the scammers target specific social media users. They might even buy targeted advertisements on social media, based on profiles. This is especially true of individual investors who do a lot of investment searching. Tons of metadata exists about what we search for. So, you might receive a targeted advertisement that promises hot investment tips.

These advertisements often also feature a celebrity’s face. At FINRA, we’ve seen advertisements that claim to be sponsored by Cathie Wood, Jim Cramer and other well-known investment professionals but are not legitimately supported by these celebrities. They are created by complete impostors who use the celebrities’ imagery and names. These advertisements almost always direct people to join an encrypted chat room, which is a huge red flag.

The encrypted chat rooms that these scammers use—such as WhatsApp, WeChat and Telegram—can’t be monitored. That is where the pump-and-dump schemes take place. They might start by discussing some large-cap investments that you already know about. Then, they’ll begin introducing an upcoming “breakout” stock that’s in its early stages and is about to get approval from the U.S. Food and Drug Administration (FDA) or something like that. But, as with the misdirected text, this is a pump-and-dump scheme in disguise.

The third way these schemes begin is by automatically adding you directly to a chat room. I’ve received a number of these. I’ll be automatically added to an investment group that includes a couple members who look like legitimate financial professionals. If you do your due diligence and look them up in a tool like FINRA BrokerCheck, they look like real professionals. They’re being masqueraded in these scenarios. At this point, these impostors begin making recommendations for small-cap stocks—often, but not always, foreign issuers—that are traditionally lowly traded, so they don’t have good liquidity and might be unknown to you. It is very possible that the issuers themselves don’t know that they are being manipulated.

One other type of investment scam that investors should be aware of is recovery operations. In many cases, particularly in high-dollar-loss scams, after someone recognizes that they’ve been victimized, they might receive a follow-on message from someone claiming to be a law enforcement agent or an attorney investigating their case. These messages rope the victim in with the promise of helping them get their money back.

Often, these follow-on scams are implemented by the very same scam group that conducted the first scam. They target an individual who has experienced a financial loss that’s significant to them and endured the tremendously emotional experience of being defrauded. The individual often wants nothing more than to go back to baseline and recover some of their losses. These recovery operations are incredibly powerful.

Most of the time, they are recognizable because they become what we used to call an advance fee scam. For example, a recent fraud victim may receive a message from someone claiming to be from law enforcement who says, “I can help you get your money back. I just need a $5,000 retainer.” They’re asking you to pay a fee to get your money returned. That’s another red flag you should be looking for.

CR: Are there similarities between these types of investment scams?

There are a few. First, these scams are, by and large, being operated offshore by criminal organizations. These organizations operate at scale and coordinate with one another to implement these schemes.

Second, there is always a dangle of reward in an investment scheme. Rewards include claims of outsized profits and guarantees or promises of “risk-free” investments. We call this dangling of wealth a “phantom rich.” Guarantees and risk-free promises—whether they’re used in a more traditional investment scheme or in today’s online investment schemes—are always red flags, because investments always involve risk.

Another similarity is secrecy. For example, the scammer may ask you to keep a secret about an exclusive opportunity to get in on the ground floor of an investment. This should make you ask, “Why was I chosen through my social media feed for an exclusive opportunity?” That emphasis on secrecy is why these encrypted chat platforms are really powerful. So, if an advertisement or message suggests that you move off platform to some sort of encrypted chat room, that is a huge red flag.

CR: How has the rise of artificial intelligence (AI) changed these investment scams?

AI is supercharging investment scams, and it’s doing so in a way that makes it very difficult to recognize the impostor. Today, it is becoming more and more critical that we start paying attention to red flags and persuasion tactics like risk-free guarantees and urgency.

It’s more difficult now than ever before to recognize when a video is using voice cloning or AI-generated images. AI is supercharging the scammers in real time to improve their scripts. We used to be able to recognize scams initiated from abroad based on their poor use of English or typos. That really isn’t a good indicator anymore because the scripts are much more perfected, accents are removed using voice cloning and punctuation errors are resolved. AI is more a tool of the scammer than a scam in and of itself.

Cynthia McLaughlin (CM): How do scammers select their victims? Is it targeted, or do they just keep sending text messages until somebody responds?

In the advertisement space, people are being selected for those scams. When advertising is being purchased, an advertiser can narrow down who the advertisement is served to based on profile characteristics. When you see advertisements on your social media feed, in most cases, you’ve probably been selected because of your search history, age, income or other demographics. In some cases, you are being spoken to directly in a way that mimics something that you would be interested in.

The misdirected text message scams are more of a broad brush. Anybody that engages with that initial text becomes a higher target because the scammers know that they have somebody they can talk to. At that point, the persuasion gets higher as the criminal operation winnows down the audience.

Many of these scams, particularly the misdirected texts, are implemented using farms of phones and SIM cards that are hooked up in lines and auto-generating messages. AI can also help facilitate some of those early text conversations. But, once a relationship starts to form, you’re more likely to be matched up with a person or team who then tries to keep the conversation going.

Once again, these scams don’t always come with the disguise of a romantic relationship. That said, in many cases, scammers are taking advantage of isolation, whether it’s physical isolation or isolation in financial decision-making. For example, if your partner delegates financial decisions to you and doesn’t participate, there’s more of a chance of manipulation because you’re making decisions in isolation; you have one defense, not two.

CR: What are the most common mistakes made by victims of fraud?

I wouldn’t call this a mistake, but the most common reaction of someone who’s been a victim of a scam is to blame themselves, retreat and not want to tell anyone. Unfortunately, that has a lot of negative effects. For one, it has a financial effect. You may not have any opportunity to get your money back, but you certainly don’t have an opportunity if you don’t report the scam.

It also has an emotional impact. When people hold things inside, their blame turns into shame, which turns into fear and distrust. As a result of the emotional manipulation of scams, we see anxiety, depression and symptoms of post-traumatic stress disorder (PTSD) in scam victims.

We really encourage people to speak up at the outset. Find a trusted individual, whether it’s your financial professional, a therapist, a close family member or friend, or a clergy member—any person you can talk to. It’s not your fault.

If you’ve been the victim of an investment scam, you need to report it. FINRA wants to hear about it, as do the U.S. Securities and Exchange Commission (SEC) and your state’s securities regulator. The best way to find your state’s securities regulator is to go to the North American Securities Administrators Association (NASAA) website. They are the cops on the beat in your state, so it’s important that they know what’s happening with investment advice in their jurisdiction. If the scam relates to commodities or something similar, report it to the U.S. Commodity Futures Trading Commission (CFTC).

Broadly, every scam should be reported to the Internet Crime Complaint Center (IC3). This is the Federal Bureau of Investigation’s (FBI) portal, and law enforcement taps into it. Let’s say that you are caught up in a cryptocurrency-related investment scheme and law enforcement is doing an investigation. If you’ve reported the scam to IC3 quickly, you could possibly get involved in one of the cases that they’re working on.

You can also report any scam to the FBI field office. Lastly, it’s important to go to your local police station at the outset and get a police report. You might need that documentation along the way.

CR: Is there anything we didn’t ask you that we should have?

The most important thing is to realize that there’s a lot of emotion to this. There are a few things you can do as an investor to protect yourself.

One is to know your sources, not just when it comes to social media, but in general. Verify information anywhere you can.

For example, if you receive a text message that looks like it’s from your investment firm and it’s asking you to verify some information, don’t click on the link in the message. People hear that advice and think they already know it, but then when they get a text message that includes the name of their firm, they sometimes think it’s okay to click on the link.

Instead, open the company’s app on your phone, type the URL from your account statement into your web browser or use a search engine to find a legitimate link to the firm’s website. (Be sure to scroll past all sponsored links on any search engine.)

Verify that you’re going to legitimate sources. That requires knowing your source and verifying information wherever you can. Sometimes that just means talking to someone else.

One of my baseline suggestions for people trying to protect themselves from scams is to tell someone else before they engage. This has three protective factors.

First, it creates a time delay. Fraudsters are trying to induce emotion, and they’re doing it at speed because we make less rational decisions when we’re in an emotional state. So, when we delay our decisions to verify information and tell someone else about the situation, we slow down our decision-making, making it more likely that we will recognize red flags.

Second, telling someone else is important because that person might know something you don’t about that particular scam or scam tactics in general.

Lastly—and, in my opinion, most interestingly—when you say something out loud, it sounds very different than when you’re mulling it over in your head. We’ve all had times when we’ve ruminated over an opportunity or a looming decision. Emotions can quickly take over, and we process our thoughts very differently when they are only in our minds than when we say them out loud. When we describe the situation out loud, it helps us see the red flags.

Not making decisions in isolation and talking to someone who you already have a trusted relationship with goes a long way to prevent any sort of victimization.

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