Financial scams using social media and digital technologies are “relatively cheap and scalable,” according to M. Owen Donley III, chief counsel of the Office of Investor Education and Advocacy at the Securities and Exchange Commission.
“We’re increasingly seeing a tie with digital and social and retail-facing security fraud,” Donley told the crowd gathered at a recent SIFMA seminar.
Retail-facing fraud directly targets individual investors and can often include offering frauds, Ponzi schemes, pyramid schemes, market manipulation, pump-and-dumps, and advance fee fraud.
An unofficial analysis by the Office of Investor Education and Advocacy found that 48% of the SEC’s litigation releases dealt with retail-facing issues.
Donley described a retail-facing fraud scheme in the ‘80s that used fax machines.
“They’d send faxes to a hundred addresses. They’d send two faxes, one after another,” Donley said. “And the first fax would say something like this, ‘Dear Dr. Smith, the hot stock tip I promised you came in. Blue Horseshoe loves Anacot Steel. Your friend, Dave. Now we’re even.’ And they’d wait five minutes and they’d send a second fax. And the second fax would say, ‘Please disregard prior fax. Sent to wrong address. Ignore, ignore, ignore.’”
A scam like this is “really hard to scale,” Donley said.
“First of all, you have to have a fax machine,” he said. “You [have] to dial all those numbers, you [have] to find doctors’ numbers. As interesting as [this scam] was, it wasn’t going to be systemically important.”
However, scams using today’s technology are much more scalable. Which may also explain how prevalent fraud has become.
A FINRA Foundation survey from 2013 found that more than 80% of respondents were exposed to financial scams. The same survey of nearly 2,400 U.S. adults age 40 and older also found that 40% of those surveyed could not identify some classic red flags of fraud.
Additionally, a 2015 Risk Alert issued by the SEC found that 54% of the examined broker-dealers and 43% of the examined advisers had received fraudulent emails seeking to transfer client funds.
“Has anyone not received less than 100 email scams? Of course everyone’s seen them,” Donley said. “That’s terrifying, but what is more interesting and what’s more scary is personalization with social and digital communication.”