By Anne Sherry, J.D.
In a townhall webinar, representatives from the SEC, Tennessee agencies, and the Better Business Bureau discussed the need to promote financial education and offered some warning signs of fraudulent investments, including in the realm of digital assets. While investors can take heed of some common markers of fraud, the universal advice is to ask for written documentation about the investment opportunity, ask questions, and check up on the broker or other individual offering the investment. "If it seems too good to be true, it probably is," cautioned the SEC’s Peter Diskin.
Moderated by University of Tennessee finance professor Ryan Z. Farley, the panel focused on improving investors’ financial literacy and ability to protect their funds against bad actors. Rachel Carden, Director of Investor Education at the Tennessee Department of Commerce and Insurance’s Securities Division, observed that individuals are unlikely to meet their financial goals through savings alone, making it critical for investors to understand what products exist and develop a specific investment strategy. However, as Tennessee Financial Literacy Commission Bill Parker described by the means of statistics, most Americans live paycheck-to-paycheck and have very little, if anything, in savings. Parker opined that financial literacy can prevent a financial incident from becoming a catastrophe.
Michele Mason, President and CEO of the Better Business Bureau Southeast TN and Northwest GA, and Peter Diskin, Assistant Regional Director for the SEC’s Atlanta Regional Office, discussed some ways in which scammers target individual investors. Mason highlighted the CFTC’s partnership last year with 30 state securities regulators to halt a precious metals fraud that targeted elderly and vulnerable investors. The defendants in that action used traditional media such as television and radio, in addition to social media, to reach older investors and sell them precious metals bullion at grossly inflated prices.
Asked by Farley what investors can do to be alert to scams, Mason and Diskin observed that there are some common markers, but they are not foolproof and can be contradictory. For example, scammers may prey on investors’ fear and create a false sense of urgency—or they may take their time to develop a relationship with the investor and attempt to build trust. The elderly are often a target, but not always, as Diskin pointed out by citing the University of Georgia student who sold purported hedge fund and bond investments to fraternity brothers and their friends and family.
To Diskin, the common element is that the people offering fraudulent investments are con artists who are very adept at gaining trust. "If it sounds too good to be true, it probably is," he said. Red flags to watch out for are promises of high, risk-free returns; high-pressure sales tactics; enticements like free meals or fee waivers; cold calls and other unsolicited offers; and affinity frauds that target members of a religious, social, political, cultural, or racial group. Mason added that pyramid schemes still occur and that even those that may seem low-risk, such as Christmas time chain letters that ask for $10, are ways of collecting people’s contact information and could open the door to identify theft.
Specifically in regards to digital offerings such as ICOs, Diskin said that the same warnings apply but that money may end up overseas, creating the additional layer of risk in recouping funds should anything go awry. The SEC has also gone after celebrities who endorse ICOs without properly disclosing their compensation for the endorsement. Recently, the agency filed an enforcement action against Blockchain Credit Partners and its two owners for issuing securities in the form of tokens, then misappropriating investors’ money or using it to pay other investors instead of investing in car loans as promised.
To protect themselves, investors should request information in writing, Google the investment or individual promoting it, and ask questions. The SEC posts information about enforcement actions and hopes that information will come up when an investor Googles the individual or entity involved, although Diskin cautioned that people may use aliases. Carden suggested that investors consult tn.gov/securities for more information and to verify that an individual or firm is registered with the Tennessee Securities Division. Diskin also plugged investor.gov as a similar resource for federally regulated investments. The public may also file a complaint or a tip with Tennessee or federal regulators at tn.gov/securities or sec.gov/tcr, respectively.