In its effort to expand investor education, the Commodity Futures Trading Commission has released a pair of videos to warn investors against buying binary options before they check the legitimacy of the seller.

A binary option is a straightforward yes/no trade that can be worth 100 or zero at expiration based on a market prediction. No other settlement price is possible, and there are no shares to exercise.

The videos star two different investors — a young man and an older man — who were both ripped off by salesmen of these products. The young man said the online ad looked interesting, the online trading platform looked legit and the broker phone calls appeared to provide personal attention.

The older man didn’t know what binary options were when he got a phone call pitching the product but invested $300 anyway.  Not a lot of money.

Eventually both investors tried to withdraw money from their accounts, which were showing profits — the older man thought he had $60,000 in his account — and both were told they had to add more money in order to qualify for the withdrawals. That’s when they realized they had been defrauded and contacted the CFTC.

The reality is that “the trading software are often fake along with the profits,” the voiceover notes.

The CFTC recommends in the video and on its website that before investing in binary options, investors:

  • Use SmartCheck.gov to see if the broker and his or her firm is registered in the U.S. (Many fraudsters are based overseas.) Many of these salespeople aren’t registered and are breaking the law and committing fraud, according to the CFTC.
  • If the firm or broker is not found, check the CFTC’s Registration Deficit List (RED List), which identifies unregistered foreign entities that the CFTC has reason to believe are soliciting and accepting funds from U.S. residents for binary options and other investments.
  • If the broker is found on SmartCheck.gov review the broker’s disciplinary history on the site.
  • Check if the binary options trading platform has registered the offer and sale of the product with the SEC and if the trading platform itself is registered with the SEC as an exchange.
  • Use FINRA’s BrokerCheck and the National Futures Association’s Background Affiliation Status Information Center (BASIC) also to see if the broker is legitimate and check out his or her disciplinary history.
  • If you suspect fraud, don’t wait to report it to the CFTC. Do it. CFTC will make that determination.

The CFTC has an extensive list of warning signs for all types of financial scams, including sales pitches that offer a high rate of return or guarantee and little or no risk.

The young man in its video says he was offered a guaranteed return if he forked over another $2,000.

The CFTC site contains numerous investigations of binary options fraud including one filed last year where the alleged fraudsters solicited Bitcoin to invest in binary options.

In all the cases the CFTC seeks restitution for investors who have lost funds but, according to a staff attorney in the videos, “restitution is very difficult.”