Investor Alert: Be on the Lookout for Advance Fee Fraud
Sept. 9, 2014
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help educate investors about advance fee fraud.
Every year, the SEC receives thousands of complaints describing a scam called an “advance fee fraud.” Advance fee fraud gets its name from the fact that an investor is asked to pay a fee up front – in advance of receiving any proceeds, money, stock, or warrants – in order for the deal to go through. The bogus fee may be described as a deposit, underwriting fee, processing fee, administrative fee, a commission, regulatory fee or tax, or even an incidental expense that fraudsters guarantee to repay later. Sometimes, advance fee frauds brazenly target investors who have already lost money in investment schemes. Fraudsters also often direct investors to wire advance fees to escrow agents or lawyers to give investors comfort and to lend an air of legitimacy to their schemes.
The variety of advance fee fraud schemes is limited only by the imagination of the fraudsters who offer them. They may involve the sale of products or services, the offering of investments, lottery winnings, found money, or many other opportunities. Frequently, fraudsters will offer common financial instruments such as bank guarantees, old government or corporate bonds, medium or long term notes, stand-by letters of credit, blocked funds programs, “fresh cut” or “seasoned” paper, and proofs of funds. Clever con artists will offer to find financing arrangements for their clients who pay a “finder’s fee” in advance. They require their clients to sign contracts in which they agree to pay the fee when they are introduced to the financing source. Victims often learn that they are ineligible for financing only after they have paid the “finder” according to the contract.
|For example, the SEC alleged that Swiss-based Malom Group AG and several individuals conducted a pair of advance fee fraud schemes in which they took approximately $11 million in advance fees from U.S. investors with the promise that the fees would allow the investors to access seemingly successful foreign trading programs. The schemes were nothing more than vehicles to steal the advance fees.
In the first scheme, Malom and its agents lured investors into “joint venture” agreements that purported to allow the investors, in exchange for an upfront fee, to participate with Malom in what were typically high-yield overseas trading programs that promised astronomical investment returns. Malom promised investors that after wiring significant advance fees into escrow accounts, Malom would explore the high-yield trading programs, enter into them, and share most of the profits with the investors. In every case, however, Malom took the advance fees and never engaged in any trading programs. After taking the fees, Malom made various excuses for why it could not enter into any transactions and then lulled investors into not taking any action against them by regularly promising to return the advance fees out of the proceeds of other imminent transactions.
In the second scheme, Malom promised to generate funding by creating structured notes that would be listed on foreign exchanges in exchange for payment of an “underwriting fee” to cover various costs associated with the transactions, in some cases supported by Brazilian sovereign bonds from the 1970s that the Brazilian government publicly disclaimed as worthless. To induce investors to pay an “underwriting fee,” Malom promised to repay the fees if successful, and issued phony guarantees to repay investors’ fees if Malom did not successfully generate funding. No structured notes were issued, none of the structured note investors received any funding, and all of the investors lost the “underwriting fees” they paid.
Advance fee fraud schemes also may try to fool investors with official-sounding websites and e-mail addresses. These addresses may contain “.gov” and end in “.us” or “.org.” U.S. government agency websites or e-mail addresses end in “.gov,” “.mil,” or “fed.us.” Be wary of a website or correspondence claiming to be from a U.S. government agency if the website or e-mail address does not end in “.gov,” “.mil,” or “fed.us.”
Sometimes, fraudsters posing as legitimate U.S. brokers or firms offer to help investors recover their stock market losses by exchanging worthless stock, typically a microcap stock (the low-priced and thinly traded stocks issued by the smallest companies), for an established blue chip stock or by purchasing the stock outright. But investors must first pay an upfront “security deposit” or post an “insurance” or “performance bond.” Never do business with a broker without checking them out first using the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck.
Be Skeptical and Ask Questions
One of the best ways to avoid investment fraud is to ask questions. Be skeptical if you are approached by somebody touting an investment opportunity. Ask that person whether he or she is licensed and whether the offering they are promoting is registered with the SEC or with a state. Check out their answers with an unbiased source, such as the SEC or your state securities regulator. You should also search the Internet for complaints about the investment or the people offering the investment.
Investors are encouraged to review the SEC publication “Ask Questions” and other SEC publications located at Investor.gov before making any investment. Some questions investors may consider asking include:
- Does it sound too good to be true? If it sounds too good to be true, it (probably) is.
- Is the investment offering registered with the SEC and my state securities agency? Where can I get more information about this investment? Can I get the latest reports filed by the company with the SEC: a prospectus or offering circular, or the latest annual report and financial statements? Check the SEC's EDGAR database to find out.
- Is the person making the offer registered with our state securities regulator? Have they ever been disciplined by the SEC, a state regulator, or other organization (FINRA or one of the stock exchanges)? Research the background of the individuals and firms offering and selling you these investments, including their registration/license status and disciplinary history:
- Search the SEC’s Investment Adviser Public Disclosure (IAPD) database.
- Search the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck database.
- Contact your state securities regulator.
- The International Organization of Securities Commissions (IOSCO) provides contact information for most international securities regulators on its website.
- Do I understand what I am agreeing to? Make sure you fully understand any investment or business agreement that you enter into, or have the terms reviewed by a competent attorney.
- Can I locate the business or person with whom I am dealing? Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address. Also, be suspicious when dealing with persons who do not have a direct telephone line and who are never in when you call, but always return your call later.
If you are thinking about investing and have any questions, do not hesitate to call the SEC's Office of Investor Education and Advocacy at 1-800-732-0330 or ask a question using this online form.
- Investor.gov: the SEC's educational website for retail investors.
- MyMoney.gov: the U.S. government's website dedicated to teaching the basics about managing your money.
- The Fleecing of Foreign Investors: Avoid Getting Burned by “Hot” U.S. Stocks
- Worthless Stock: How to Avoid Doubling Your Losses
- Protect Your Money: Check Out Brokers and Investment Advisers
- Fake Seals
- SEC Warns of Government Impersonators
- https://www.treasurydirect.gov/instit/statreg/fraud/fraud_primebank.htm: the U.S. Department of the Treasury’s website dedicated to helping investor’s identify prime bank instrument fraud.
- Saving and Investing Basics: For general information about saving and investing, please see Saving and Investing: a Roadmap to Your Financial Security through Saving and Investing. This publication is also available in Spanish.
- Ask Questions: For a list of questions you should ask when considering an investment, see Ask Questions: Questions You Should Ask about Your Investments. This publication is also available in Spanish.