The Only Constant is Change: Evolving Investment Frauds

Welcome to the April 2018 edition of our newsletter!  In this issue, we’ll examine the evolution of investment frauds which rely on increased complexity of financial instruments to prey upon investors.

It’s Complicated: Intricate Financial Investment Choices Lead to Increase Risks

Within the last decade, mathematics has become an increasingly important part of investing, both for large institutional holders and smaller investors.  While puts, calls and options have existed for decades prior, the use of these instruments in markets where newer technologies – high-frequency trading, cryptocurrencies and the like — also exist poses new types of risks.

As a result, various iterations of old scams have gained new contours.  For example, one fraud that is on the rise is binary options, which bets on whether an asset’s price fluctuation within a set time frame, where an investor can reap a pre-set gain or lose the entire investment, depending on whether certain conditions are met.  While currently legal within the United States, many firms offering this strategy are outside of the United States, which can create both greater opportunities for fraud and greater difficulties in pursuing remedies if a fraud is discovered.

Another type of emerging fraud is the rise of phony offerings in legitimate initial public offerings.  As markets embrace a new technology boom, investors are salivating at the prospect of getting in on the ground floor of the next Facebook or Google.  Many of these scams use social media to build word of mouth and excitement for an offering that may not have actually happened, or have happened years earlier for companies that are already publicly traded.

Getting Ahead of the Curve: Evaluating Ever-Changing Risks

U.S. regulators do offer some information that can be helpful in evaluating risk for newer types of investments, often even if the investment is held outside the United States.  The Securities and Exchange Commission has records about offerings, while the Commodity Futures Trading Commission regulates the contracts involved, if the trading platform is within a contract market, concerning more complex instruments like binary options.  For new twists on old scams, like fake pre-IPO offerings, seeking other sources, like SEC filings and news articles, to determine if a company is actually going to go public – or already has – can help identify scenarios that are too good to be true.  Markets and technology seemingly will always evolve more quickly than most investors’ understanding of them, and in that gap fraudsters will lie in wait.  By doing proper due diligence about investment brokers are other providers, your clients can see the risks before they pursue the next big investment trend.