The Fleecing of Foreign Investors:
Avoid Getting Burned by "Hot" U.S. Stocks
We encourage all investors to thoroughly investigate any investment opportunity and the person promoting it before you part with your money—especially if you are a non-U.S. investor seeking to invest in U.S. stocks. This is particularly important if you learn about the investment on the Internet or hear about it over the telephone from a broker you don’t know.
The recent globalization of world financial markets and the strength of the U.S. securities markets have fueled a strong demand by foreign investors for U.S. stocks. But this increased appetite has, in turn, spawned new types of fraud. This alert describes how some of these scams work, provides tips on how to avoid them, and tells you where to find help.
What the Frauds Look Like
Many of the new frauds target investors worldwide who purchase "microcap" stocks, the low-priced and thinly traded stocks issued by the smallest of U.S. companies. If the stock price falls, the fraudsters swoop in, falsely claiming that they can help investors recover their losses—for a substantial fee disguised as some type of tax, deposit, or refundable insurance bond. Here’s how some of the most common schemes work:
* Aggressive Sales—Dishonest brokers purchase large blocks of stock from U.S. issuers at a deep discount. They then use high-pressure sales tactics to persuade non-U.S. investors to buy, often at extremely inflated prices. Once the brokers have finished selling the stock, the price typically collapses, leaving investors vulnerable to substantial losses.
* Absentee Brokers—For many investors, the scam ends here. When they attempt to contact the individuals who sold the worthless stock, the investors discover that the brokers have disappeared.
* Advanced Fee Schemes—For other investors, the fraud takes on a new twist. Fraudsters posing as legitimate U.S. brokers or firms offer to help the investors recover their losses by exchanging the worthless stock for an established, blue chip stock or by purchasing the stock outright. But investors must first pay an upfront "security deposit" or post an "insurance" or "performance bond."
* Further Demands for Money—As long as an investor appears willing to make payments, the fraudsters will keep asking for more—falsely claiming that the payments will cover additional fees, taxes, bonds for the courier service, or other similar expenses.
How to Avoid Getting Burned
The best way to protect against investment fraud is to ask tough questions about the opportunity and the people promoting it—before you invest. For example, you’ll want to know:
* Are the Broker and the Firm Licensed? Contact your securities regulator to find out. The International Organization of Securities Commissioners (IOSCO) provides contact information for most securities regulators on its website. Be sure to ask whether the broker or the firm has a history of complaints. If the person claims to work with a U.S. brokerage firm, call the NASD's public disclosure hotline at (800) 289-9999, or visit its website.
* Is the Investment Registered with SEC? Check the SEC's EDGAR database to find out. But always remember the fact that a company has registered its securities or has filed reports with the SEC doesn't guarantee that the company will be a good investment. Likewise, the fact that a company hasn't registered and doesn't file reports with us doesn't mean the company is a fraud.
* Where Does the Stock Trade? Many frauds involve microcap companies whose stocks are quoted in the "pink sheets" or on the OTC Bulletin Board. These companies generally do not meet the minimum listing requirements for trading on a national exchange, such as the New York Stock Exchange or the Nasdaq Stock Market. And companies quoted in the pink sheets generally do not file reports or audited financial statements with the SEC. It can be very difficult for investors to find reliable, unbiased information about microcap companies. For that reason, microcap stocks can be among the most risky investments.
* What Is the Stock Price in the U.S.? Before you purchase any U.S. stock, be sure to independently confirm its current U.S. trading price. Dishonest brokers may charge you a much higher price, assuming that you’ll never check. The Nasdaq’s website—at quotes.nasdaq.com—features current quotes for stocks listed on the New York Stock Exchange, American Stock Exchange, and the Nasdaq Stock Market and for stocks quoted on the OTC Bulletin Board.
* How Can I Independently Research This Opportunity? Always ask to see—and carefully read—written information about the company, including a prospectus and recent financial statements. But also research the company on your own. For tips on how to do this, please read our online publication entitled Get Info About Companies.
These additional tips can help you avoid unscrupulous brokers:
* Look Past the Name—Some fraudsters illicitly use the names of legitimate brokers and brokerage firms. Be sure to compare any address a broker gives you with the address you obtain from your securities regulator or the NASD. If they are not the same, you may be dealing with a fraudster.
* Independently Verify References—Never rely solely on the references given to you by a broker you’ve never worked with before. The "satisfied clients" or "international organizations" they suggest you contact may well be part of the scam.
* Be Wary of Unusual Banking Instructions—Most reputable brokerage firms in the U.S. use U.S. banks and would not, for example, ask you to transfer money to a U.S. bank for further credit to a non-U.S. bank.
For more tips, please read our online brochures entitled Ask Questions and Microcap Stock: A Guide for Investors.
Where to Turn for Help
If the case appears to involve a U.S. broker, please send your complaint in writing to the SEC using our online complaint form. Be sure to include as many details as possible, including the names, addresses, telephone or fax numbers, and e-mail addresses or websites of any person or firm and the dates of each contact.
Because many investment scams occur entirely outside the U.S., the SEC may not have jurisdiction to investigate and prosecute wrongdoers—even if the fraud involves stock issued by a U.S. company. If you run into trouble, contact the securities regulator for your home country and also the country where the broker or recovery room operator does business. You can also visit The University of Toledo School of Law's website to find links to many foreign regulators, including those that regulate their securities, banking, and insurance industries.