In a recently published alert, the U.S. Security and Exchange Commission (SEC) provides useful guidance to help investors avoid fraudulent schemes based upon investment newsletters. It’s a common problem, with investors often getting enticing information through online or hard copy newsletters. The alert points out that, though many investment newsletters are legitimate, some have been found to deceive investors.
The SEC alert lists a number of things to watch out for, including:
- Touting – This is when a newsletter promotes a stock without properly disclosing compensation received for the promotion.
- “Pump and dump” schemes – This involves pumping up a company’s stock price by making false and misleading statements to create a buying frenzy, allowing the promoters to then sell shares at the pumped up price.
- Scalping – This is simple recommendation of a stock to drive up the stock price, and then selling shares of the stock at inflated prices to generate profits.
- Undisclosed conflicts of interest – This is falsely claiming to provide independent analysis, or failing to explain conflicts of interest (or biases), including financial incentives, that may influence the investment recommendations.
- False performance claims – misrepresenting the track record of the newsletter’s investment recommendations.
If a newsletter promotes a particular stock, read carefully what the newsletter says about compensation it receives and look for these red flags:
- No disclosures – Be suspicious if the newsletter does not disclose having received any compensation.
- Vague disclosures – Be skeptical of newsletters that do not specifically disclose who paid them, the amount, and the type of payment.
- Buried disclosures – Be wary if the newsletter’s disclosures are difficult to find or appear in tiny, hard-to-read print.
- Questions about your stock purchases – Be careful if a newsletter representative asks you detailed questions about your stock purchases like how many shares you bought, when you purchased the shares, or which broker you used to buy the shares. The newsletter publisher may make money based on the amount of shares its subscribers buy.
Even if a newsletter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may include such disclosures to create the false appearance that the newsletter is legitimate.
Fraudsters may also use newsletters as a way to get their foot in the door to pitch fraudulent investments by phone. Be careful if someone tries to get you to subscribe to a newsletter and then calls you with specific investment recommendations.
When considering any potential investment, watch out for these warning signs of investment fraud:
- Promises of high investment returns – Be highly suspicious if the promoter guarantees you a high rate of return on your investment.
- Pressure to buy RIGHT NOW – Be skeptical if the promoter pitches the investment as a “limited time only” opportunity, especially if the promoter claims to base the recommendation on “inside” or confidential information.
- Sounds too good to be true – Exercise caution if the investment sounds too good to be true. Investments providing higher returns typically involve more risk.