The Fleecing of Foreign Investors: Avoid Getting Burned by "hot stocks"

We encourage all investors to thoroughly investigate any investment opportunity and the person promoting it before you part with your money—especially if you are a non-U.S. investor seeking to invest in U.S. stocks. This is particularly important if you learn about the investment on the Internet or hear about it over the telephone from a broker you don’t know.

The recent globalization of world financial markets and the strength of the U.S. securities markets have fueled a strong demand by foreign investors for U.S. stocks. But this increased appetite has, in turn, spawned new types of fraud. This alert describes how some of these scams work, provides tips on how to avoid them, and tells you where to find help.

What the Frauds Look Like

Many of the new 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, 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. Here’s how some of the most common schemes work:

• Aggressive Sales
—Dishonest brokers purchase large blocks of stock from U.S. issuers at a deep discount. They then use high-pressure sales tactics to persuade non-U.S. investors to buy, often at extremely inflated prices. Once the brokers have finished selling the stock, the price typically collapses, leaving investors vulnerable to substantial losses.
• Absentee Brokers
—For many investors, the scam ends here. When they attempt to contact the individuals who sold the worthless stock, the investors discover that the brokers have disappeared.
• Advanced Fee Schemes
—For other investors, the fraud takes on a new twist. Fraudsters posing as legitimate U.S. brokers or firms offer to help the investors recover their losses by exchanging the worthless stock 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."
• Further Demands for Money
—As long as an investor appears willing to make payments, the fraudsters will keep asking for more—falsely claiming that the payments will cover additional fees, taxes, bonds for the courier service, or other similar expenses.