Avoiding Summertime Scams

Summer! A time to relax, unwind and spend time with family and friends in the sun. Unfortunately, scammers are also heating up, spinning new ways to steal assets and private information. Here we will round up a couple of the latest financial scams garnering headlines—and how to avoid them, so you can enjoy a stress-free, safe summer.

A new twist on the traditional “pump and dump” scheme

In a typical pump and dump, the perpetrator buys a stock, usually a penny stock (those trading below $1 per share, though definitions vary). They then mount a huge campaign urging others to buy, often by touting huge potential returns via financial newsletters, radio, phone calls and the like. As greedy investors swarm, massive inflows drive up the stock’s price until the instigator sells their holdings and ends the campaign, tanking the price and leaving victims with a loss. This is classic market manipulation—illegal, of course—and there is a loooooong list of people convicted. It has inspired some popular Hollywood films, too.

But there is a new twist today: Scammers, masquerading as “financial advisers,” are recruiting their victims through social media and messaging apps.^[i] They often urge people to buy US-listed Chinese companies—typically stocks that tanked after their initial public offering (IPO). Through manipulative trading, scammers can produce hot short-term gains on the stock, using it as a selling point to victims. And, as always, the perpetrators dump their shares when the time is right, reaping big gains and leaving victims in the red. Or maybe they short the stock after the rise and before the “dump,” double dipping on manipulated gains.

A few mental exercises can help avoid all of this. One, always consider the why you are considering buying a stock. Chiefly, in our view, it should about finding the companies best fitting your outlook for their sector and industry—you should be able to make a case about industry trends as well as the management team, product lines and the overall earnings environment, to name a few. It is generally unwise to seek companies that are massive outliers performance-wise, as they could just as easily be outliers to the downside as well as up. 

What you shouldn’t base stock decisions on is also key. In our view, that would include a hot inside tip about a pending merger or other purported catalyst. Anyone peddling this is quite likely insider trading (illegal) or committing fraud (illegal). Nor should it be about chasing sky-high instant returns. Many financial scams, including this one, tap into a “get-rich-quick” mentality. This is precisely why they use penny stocks—in addition to being easy to move because of thin trading volumes, if a stock is trading at $0.10/share, the upside can seem huge. If I hold until it reaches just $1/share, that represents a 900% gain! But, like any stock, this is very, very unrealistic in the short term. Don’t fall for it. Penny stocks are usually penny stocks for a reason.

Also think about who is telling you to buy it. A reputable investment professional isn’t going to spam you randomly on WhatsApp or any social media. That goes whether the texter is hawking penny stocks, cryptocurrencies or whatever else may be flooding your feed. In our view, the best approach when you receive a message touting a “huge financial opportunity” out of the blue is to delete and block. And more generally, if any investing opportunity seems too good to be true, it probably is. Successful investing, in our view, is about patience and discipline over the long term. Compound growth, not instant riches.

Social Security fraudsters also have a new approach

Mind you, the old scams are still around—the latest Social Security Administration (SSA) reports show many folks are still submitting false benefit applications to steal others’ social security checks.^[ii]

But now, bad actors have also taken to impersonating government agents.^[iii] Widespread reporting suggests they start by reaching out via phone, email or snail mail, warning of issues with your benefits or requesting to verify your personal information to ensure your payments keep coming. Some even offer additional benefits, like a stimulus check, as a reward for this information. Sure enough, they disappear after gaining access to your benefits or personal information.

If you or a loved one receive a communication like this, keep the following in mind. First and foremost, Social Security will never call or email you requesting information. Per their website, the SSA sends only courtesy emails to follow up on in-person visits or official phone calls.^[iv] An information-for-reward swap is also a massive red flag. The SSA will never offer money or reward in return for information. Under no circumstances, ever.

Physical mail is their communication of choice for business matters. And yes, scammers are reportedly also sending letters. So if you receive anything even slightly suspicious in the mail, the SSA recommends taking it directly to your local Social Security office. If it is legitimate, you can address the problem then. If it isn’t, you can help them raise awareness of scams. Or, you can do an Internet search of the letter’s text to see if others have reported it as a scam, then report potential fraud online or over the phone. Just do not reply to the letter itself.

Overall, keeping a cool head in these situations is key. Slow down, breathe and take time to investigate before making snap decisions. Remember these bad apples are trying to panic you into acting—never the right decision, in our view.