Simple Steps to Defend Yourself Against Financial Predators

Investors have a lot on their plate these days, from tax season to stories of investing opportunities promising big returns—including the newest fad, digital art. All the noise can be overwhelming, and, unfortunately, ne’er-do-wells will seek to exploit honest folks’ emotions. To help you shore up your defenses, your friendly MarketMinder Editorial Staff has round up examples of illicit activity garnering financial headlines recently—and has some tips on protecting yourself. 

Watch Out for the Pump and Dump

Stories of huge investing successes may tempt some to chase big returns, leaving them susceptible to a common investment scam: the pump and dump. This scheme often involves shares of tiny companies that trade for less than $5 a share—also known as penny stocks. These thinly traded securities usually trade on over-the-counter (OTC) markets rather than major stock exchanges. Some were caught up in January’s Reddit frenzy, hence the heaps of attention now.

In a pump and dump, stock promoters typically claim a forthcoming announcement or big new investment strategy will bring big returns for a certain company, making this a ground-floor buying opportunity. Their goal is to get unwitting investors to buy shares on the false premise—thereby pumping up the price. The hucksters then sell (aka dump) their own shares. Since penny stocks often lack liquidity, those left holding the bag usually have to take a major, if not total, haircut.

“Pump and dump” isn’t new, but promoters have adapted with the times. Instead of landlines, they use emails, blog posts and social media. Yet the telltale signs remain the same: claims of possessing exclusive information nobody else has; promises of quick riches; appeals to act now or miss out. These tactics aim to exploit folks’ greed—something to be mindful of with optimism increasingly widespread today.

Tread Carefully With New Fads

Nonfungible tokens (NFTs) have taken the world by storm in recent weeks—and related fraud showed up almost as quickly. NFTs are pieces of digital content that use blockchain technology to create a verifiable, unique certificate of ownership. Essentially, they create scarcity for digital assets, enabling the existence of digital collectibles—which include artwork, tweets and sports video highlights. Some NFTs have fetched sky-high prices, with a piece of NFT art recently selling for a record $69 million at auction.^[i]

The hype and popularity have led to rampant NFT deception, with thieves stealing artists’ work and selling it without permission.^[ii] Buyers have little recourse if they buy a NFT of a fake or stolen digital work. We aren’t anti-NFT, but it is important to understand what you are buying. NFTs are receiving attention in the investment world due to their association with cryptocurrencies, but they aren’t securities. They aren’t listed on exchanges and don’t have transparent, on-demand pricing. They are illiquid collectibles—the same category as fine art, beanie babies and baseball cards. It is critical to do your research, as getting caught up in a speculative frenzy and buying something you don’t understand may leave you with buyer’s remorse, not to mention a worthless fake.   

Beware Wolves in Taxpeople’s Clothing

Few want to run afoul of the IRS—a fear some shady characters try to take advantage of. Though the IRS extended the federal filing deadline to May 17, some taxpayers may be dealing with new, pandemic-related situations—adding to their stress and giving more reason to be cautious with any purported tax-related communications. Predators may impersonate IRS agents through phone calls, text messages and email to intimidate unsuspecting folks into giving personal information. One cybersecurity firm recently identified a new hacking campaign that uses fake tax documents to gain access to users’ computers.^[iii]

The IRS also started issuing another round of Economic Impact Payments (i.e., COVID relief checks) in mid-March. Some miscreants offer to expedite or provide your payment in exchange for personal information and/or a fee. Ignore those shams. Qualified recipients can find their payment status on the IRS website. Generally, recipients don’t need to take any additional action, as payments are sent via direct deposit or by mail (as a check or debit card).

Whether for taxes or stimulus payments, the IRS won’t send unsolicited texts, emails or social media messages. Most notices will arrive through regular mail delivered by the USPS. The IRS will also never demand payments via gift card or cryptocurrency or threaten arrest or lawsuits.

How to Arm Yourself Against a Widespread Problem

According to the US Federal Trade Commission (FTC), consumers filed 2.1 million reports of fraud—and reported losses of more than $3.3 billion—in 2020, up from 2019’s $1.8 billion.^[iv] These numbers likely understate the damage, as not all victims report their losses, and one research outfit estimates 2020 consumer losses exceeded $50 billion.^[v] This isn’t just an American phenomenon: The UK reported about £2 billion ($2.8 billion) in consumer losses last year.^[vi]

We don’t share these figures to scare. Our intent is to highlight how widespread the problem is, reinforcing the importance of guarding yourself. Despite their best efforts, regulators can’t stop every con artist. So here are some simple, actionable tips to protect yourself:

• Don’t respond to unsolicited, unexpected communications—especially those asking for personal information. If you think a message is legitimate—or just aren’t sure—reach out to the government agency or institution directly, using their official, publicly listed contact information.
• Don’t click on links in unsolicited emails. Doing so could install malicious malware on your computer, leaving you vulnerable to hackers.
• Do update your passwords, ensuring you have a unique and complex password for each online account/profile you own. If you are worried about keeping track of these try using a secure password manager.

Ask yourself some basic, high-level questions, too. Are solicitations playing on your emotions? Does an offer sound too good to be true? While charlatans, like cockroaches, will likely be with us until the end of time, some healthy skepticism and constant vigilance can go a long way in helping you avoid being a victim.