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Fake Seals and Phony Numbers: How Fraudsters Try to Look Legit

Dec. 2, 2009

It's a hard, cold fact: fraudsters lie. That's how they attempt to make money. They lie when they promise you "guaranteed" high returns with little or no risk. And they lie when they forget to mention that the company or product they're touting doesn't exist.

Some fraudsters tell straightforward lies, fabricating facts or making bogus claims. That's why we encourage investors to do their own independent research and to remember that wonderful, timeless adage: "If it sounds too good to be true, it probably is." Other fraudsters salt their stories with grains of truth to give their schemes an air of legitimacy. For many years, the SEC and securities regulators around the globe have been encouraging investors to investigate before they invest — to ask tough questions about their investments and the people who sell them. Taking their cue from us, some fraudsters now pretend to do the same.

One ruse fraudsters use involves assurances that an investment has been registered with the appropriate agency. The fraudsters will purport to give you the agency's telephone number and invite you to verify for yourself the "authenticity" of their claims. But even if the agency does exist, the contact information almost certainly will be false. Instead of speaking with an actual government official, you'll reach the fraudsters or their colleagues — who will give the company, the promoter, or the transaction high marks.

Another trick involves the misuse of a regulator's seal. The fraudsters copy the official seal or logo from the regulator's website — or create a bogus seal for a fictitious entity — and then use that seal on documents or web pages to make the deal look legitimate. You should be aware that the SEC — like other state and federal regulators in the U.S. and around the world — does not allow private entities to use its seal. Moreover, the SEC does not "approve" or "endorse" any particular securities, issuers, products, services, professional credentials, firms, or individuals.

Here's how you can protect yourself against these and other deceptive tactics:

   *   Deal Only With Real  Regulators — It's not hard to figure out who the real regulators are and how you can contact them. You'll find a list of international securities regulators on the website of the International Organization of Securities Commissions (IOSCO) and a directory of state and provincial regulators in Canada, Mexico, and the U.S. on the website of the North American Securities Administrators Association (NASAA). If someone encourages you to verify information about a deal with an entity that doesn't appear on these lists — such as the "Federal Regulatory & Compliance Department," the "Securities and Registration Compliance" agency, or the "U.S. Securities Registration Bureau" — you're probably dealing with fraudsters. You'll find legitimate contact information for the SEC in the Contact Us section of our website and on SEC Division Homepages. If you're ever unsure whether you're dealing with someone from the real SEC, use our online Question Form to ask us.
   *   Be Skeptical of Government "Approval" — The SEC does not evaluate the merits of any securities offering, nor do we determine whether a particular security is a "good" investment. Instead, the SEC's staff reviews registration statements for securities offerings and declares those statements "effective" if the companies appear to have satisfied our disclosure rules. In general, all securities offered in the U.S. must be registered with the SEC or must qualify for an exemption from the registration requirements. You can check to see whether a company has registered its securities with the SEC and download its disclosure documents using our EDGAR database of company filings.
   *   Look Past Fancy Seals and Impressive Letterheads — Most people who use computers know how easy it can be to copy and paste images. As a result, today's technology allows fraudsters to create impressive, legitimate-looking websites and stationery at little to no cost. Don't be taken in by a glossy brochure, a glitzy website, or the presence of a regulator's official seal on a web page or document. Again, the SEC does not authorize private companies to use our seal — even as a legitimate link to our website. If you see the SEC seal on a company's website or materials, think twice.
   *   Check Out the Broker and the Firm — Always verify whether any broker offering to buy or sell securities is properly licensed to do business in your state, province, or country. If the person claims to work with a U.S. brokerage firm, call FINRA's Public Disclosure Program hotline at (800) 289-9999 or visit FINRA's website to check out the background of both the individual broker and the firm. Be sure to confirm whether the firm actually exists and is current in its registration, and ask whether the broker or the firm has a history of complaints. You can often get even more information from your state securities regulator.
   *   Be Wary of "Advance Fee" or "Recovery Room" Schemes — An increasing number of investment-related frauds target investors worldwide who purchase "microcap" stocks, the low-priced and thinly traded stocks issued by the smallest of U.S. companies. If the stock price falls or the company goes out of business, the fraudsters swoop in, falsely claiming that they can help investors recover their losses — for a substantial fee disguised as some type of tax, deposit, or refundable insurance bond. As soon as an unwary investor pays the "advance fees," the fraudsters disappear — leaving the investor with even higher losses. For more information about these types of frauds, please read our publication entitled The Fleecing of Foreign Investors.

If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on a promoter's promises or what you see on the Internet — especially if the investment involves a small, thinly-traded company that isn't well known. And don't even think about investing on your own in small companies that don't file regular reports with the SEC, unless you are willing to investigate each company thoroughly and to check the truth of every statement about the company. For more information on investing wisely, visit the Investor Information section of our website.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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