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Compliance & Risk

US state securities regulators label social media as “new cold call,” ripe for fraud

· 5 minute read

· 5 minute read

The North American Securities Administrators Association (NASAA) has highlighted social media fraud as a significant theme of its annual enforcement report for 2019.

The article was written by Jason Wallace, a member of Thomson Reuters Regulatory Intelligence team in San Diego.

NASAA, representing state securities regulators, has identified social media tactics as the new era’s “cold calling,” and characterized it as a potential avenue for scammers to fraudulently profit from the ongoing COVID-19 pandemic.

According to its annual enforcement report, pop-up advertisements and other ads on social media feeds geared toward a user’s personal interests and prior search history has made it like unsolicited telephone calls of the past. “Pop-up advertisements and other ads on social media feeds are geared toward a user’s personal interests and prior search history, helping to make social media the new cold call,” the report said.

The report also highlights the coordinated enforcement efforts to fight online fraud preying on the weary and frightened population with phony offers of everything from virus cures to guaranteeing lost income.

Enforcement report

The NASAA enforcement report is based on 2019 data and includes responses from 51 jurisdictions throughout the United States. The state securities regulators conducted 6,525 investigations in 2019, up 23% from the year before, and took 2,755 enforcement actions, up 33% from 2018. The actions led to $634 million in restitution ordered returned to investors, fines of $80 million and criminal relief of 956 years, including incarceration and probation.

In 2019, more than 4,800 license or registration applications were withdrawn as a result of state action or attention, a slight increase from approximately 4,500 withdrawals reported during 2018. NASAA has found many of the withdrawals were due to state investigations or forthcoming actions to deny, suspend or revoke their applications. The report has also highlighted an increase in investigations of investment adviser firms and representatives.

In addition to the statistics, NASAA reported enforcement trends. The enforcement trends focused on social media used to make fraudulent claims, stopping senior deception, promissory-note fraud, and misconduct tied to Regulation D private offerings.

Social media

The NASAA member examinations and enforcement cases uncovered fraud using social media, with the report citing state enforcement cases of fraudulent claims of investment guarantees.

The traditional cold call refers to an unsolicited telephone call seeking personal information or trying to make a sale; social media is now used frequently to approach new prospects and take the place of the outdated phone call, said the report. For example, NASAA found it was not uncommon to see pop up advertisements for a recently searched item when scrolling through social media posts. While these ads make it convenient to respond, they can also be easily ignored or deleted, like hanging up on a cold call.

NASAA states that social media is often anonymous. Their compliance examinations found that the “information social media users post, respond to and search is available to anyone who wants to promote and sell investments whether in stocks, precious metals, real estate or many more types of ‘special opportunities’,” the report noted.

Enforcement actions that expose social-media scammers focus on sites where users review purchases, then use that information about personal interest to focus their sales pitch. NASAA found it is extremely difficult to locate who is really behind an offer when purchasing products on social media. When online offers are clicked, personal information provided is stored and may be available to those with ulterior motives.

NASAA exams and investigations found some of these offers will be legitimate, but most are not. The report identified three state enforcement cases that found multiple untrue statements and false guarantees using a firm’s website, online marketplaces and even a pop-up advertisement on Facebook for an investment opportunity claiming to falsely guarantee returns.

According to the U.S. Securities and Exchange Commission’s advertising rule, advisers are prohibited from making guarantees or distributing any advertisements that contains any untrue statement of material fact, or that is otherwise false or misleading. Therefore, absent outright fraud, investment advisers must be aware of online content that could take a promissory tone and be construed as a guarantee or ultimately misleading.

In many cases, a firm can check its online content for the use of superlatives such as “outstanding,” “superior” or “world class,” or trite clichés such as “state-of-the-art.” These terms generally cannot be substantiated and should be eliminated.

COVID-19 scams

During times of crisis, scammers attempt to take advantage of the investing public at their most desperate times. Therefore, individuals and firms must be on the lookout for advertisements that look too good to be true or offer an answer to a crisis, or pandemic in this case.

Therefore, NASAA coordinated a COVID-19 enforcement initiative to detect, disrupt and deter schemes targeting investors through social media, suspicious websites and online advertising platforms and message boards. As of August 19, 2020, the state regulators have identified 244 schemes, initiated 111 investigators representing 44 jurisdictions and taken 220 actions in response to COVID-19 scams.