In Volatile Times, Fraudsters Are Masquerading as Legitimate Brokers

When markets drop sharply or show signs of turbulence, investors often shift their assets to what they perceive to be safer investments. But fraudsters know this — and they can quickly change their pitches to match what investors seek.

In some instances, fraudsters misuse the name of a real registered investment professional or firm to give their schemes the appearance of legitimacy. FINRA previously issued an investor alert on this topic (see Websites of Interest), describing how impostor schemes rely on a tactic known as source credibility — building credibility by claiming to be properly registered and employed by a reputable firm. FINRA has also seen instances where fraudsters not only impersonate a registered investment professional, but also offer fictitious securities investments or banking products.

For example, one investor recently avoided an impostor scam by recognizing red flags of fraud. The investor searched online for certificate of deposits (CD) and found a promising CD, yielding just slightly above the prevailing market interest rate, from what appeared to be a well-known brokerage firm.

While the investment did call for a $500,000 minimum deposit, the marketing materials claimed there was no penalty for early withdrawal and the investment was FDIC insured.

Still, the investor conducted addi­tional research, including a review of FINRA’s BrokerCheck, to determine the legitimacy of the opportunity. Both the investment professional and the brokerage firm appeared to be registered with FINRA. He filled out an official-looking account application — displaying the logo of the brokerage firm —and received instructions for wiring money to fund the account.

Fortunately for this investor, he was attuned to red flags that led him to disengage from the scammer and report his suspicions to the regulators at FINRA.

Watch for These Red Flags

Inconsistent registration information.

BrokerCheck indicated the salesperson worked out of New York and yet he told the investor he was located in California.

Inability to verify firm association.

While the salesperson claimed the investor’s account was with a subsidiary of a well-known, registered brokerage firm, the investor was unable to verify that the firm had a subsidiary by that name.

Differing product details.

The product name and features provided to the investor did not match up with those found in an independent search of the CUSIP number (a unique identifier for securities).

Request to wire funds overseas.

The investor was instructed to wire money to an overseas third party to facilitate the transaction. These red flags were enough to stop the investor from losing hundreds of thousands of dollars to an impostor scam. We share his story to help others who might encounter similar offers. The salesperson was posing as a registered investment professional, hiding behind a stolen identity and a fictitious email address, fictitious website,  and a fictitious product.

Tips for Spotting and Avoiding Impostor Scams

1.) Ask and check.

In other words, do your research. Before making any investment decision, ask about any individuals you are dealing with, any financial institutions represented, and any investment products you are considering. You can check information about investment professionals on FINRA BrokerCheck, a free online tool, to obtain information on brokers, investment advisers, and registered investment firms. Pay attention to any inconsistencies between what the individual you are dealing with represents, and what is displayed in BrokerCheck. You can also use BrokerCheck to verify the main contact number for the investment firm. It is also important to clarify what type of product you are purchasing and what type of financial institution you are working with, since products sold by banks, investment firms, and insurance companies may come with vastly different terms and features.

2.) Be skeptical.

In times of vola­tility, investors may be drawn to investments offering lower, but more stable returns. If a website is offering only one type of instrument, and no other instruments com­monly offered by that type of financial institution or investment firm, this should give you pause. Investors should also take caution if an investment requires a high minimum deposit, such as $200,000 or more, and should independently verify claims of low risk, FDIC insurance coverage, and no penalties for early withdrawals. Fraudulent investment offerings may also advertise substantially higher interest rates than found at other financial institutions, as described in FINRA’s Investor Alert on High Yield CD Offers.

Take caution if you are directed to wire funds to an account located outside the U.S. or to a third-party U.S. based account with a different name from the financial institution on the marketing materials. In addition, be cautious if you only interact with an individual through email or other online channels, they refuse to meet in person or through video chat, or they can’t be reached by contacting the financial institution directly.

3.) Conduct independent research.

Take time to do your research, using regulatory tools rather than links the promoter provides, and watch for red flags of fraud. Fraudsters often spoof legitimate companies using similar-looking websites with similarly spelled web addresses and similar-sounding names. Does the promoted website or product come up in an independent web search for the registered firm?

Look for inconsistencies between what is being pitched and what can be validated online, such as a CUSIP number that appears legitimate but other product details that do not match your online research. Consider calling the financial institution using a telephone number found somewhere other than the suspect website, such as the telephone number listed on BrokerCheck if the firm is registered with FINRA, to determine the legitimacy of the investment opportunity or the investment professional. And even if the seller and the investment are registered, discuss your decision first with a family member, investment professional, lawyer, or accountant.

If you are suspicious about information you receive from an individual or firm soliciting your business, contact FINRA or another regulator BEFORE you send any personal or financial information. If you suspect that you or someone you know has lost money to an impostor scam involving a broker-dealer, send a tip to FINRA or file a complaint. Investors can also contact the FINRA Securities Helpline for Seniors, toll-free, at 844-57 HELPS (844-574-3577).

If you are an investment professional and have concerns that someone is using your name or information as part of a potential scam, contact your firm’s compliance department, and alert FINRA by calling our BrokerCheck hotline at 800-289-9999.

This article was originally published in the October 2020 issue of BetterInvesting Magazine.

FINRA is the largest indepen­dent regulator for all securities firms doing business in the U.S.  Its chief role is to protect investors by maintaining the fairness of the U.S. capital market.
Websites of Interest
FINRA Investor Alert on Fraud:
FINRA BrokerCheck:

Sample Our Resources Open House Get Your Resources