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Understanding what lurks behind 'insider information'

  • Published
  • By Debora Whipple
  • N.J. Bureau of Securities, Office of the Attorney General
MCGUIRE AIR FORCE BASE --  Voicemails, e-mails or faxes can lead investors to being financially harmed because the information can appear to be valuable insider information, urging you to buy.
 
Messages left on voicemails, sent by fax or even come through e-mails by "mistake" claiming they contain valuable stock information with some winning tip. The message appears to be intended for someone else, not for you. But, was it really meant for you, the next unsuspecting victim, and just skillfully designed to appear that it was for someone else? The message is intended to be so attractive that it entices the listener or reader to want to invest by taking advantage of this insider information. 

The message might sound like this: "Hey Joe, this is Mary. You've got to check out this investment -- dump everything you can into this. It is going to be a big winner for us. My friend works for XYZ Company and has access to private information about this going big. He confidentially told me but I can't help but tell you and my sister. Buy what you can!" Despite this message seemingly being intended for someone else, many investors are enticed into investing in this "golden opportunity" that was "fortunately," but mistakenly it seems, put in their hands. 

This type of scam ran rapidly across several states and had regulators watching carefully. New versions will surely show up again. This scam is one form of a securities fraud known as a "Pump and Dump" scheme. It works like this. Fraudsters buy shares in low-priced stocks, known as penny stocks, which are stocks that are priced under $5 a share. Their next step is to spread false information through the mail, phone or internet. After investors have been caught up in the hoax and bought shares, resulting in an inflated value of the stock, the scam artist sells or dumps his stock at this new higher price. The scam artist makes a bundle the stock then drops in price (because there is little or no real demand for the stock to support the higher price) and the investor is left with worthless stock. 

One clever way the scam artist can operate is by sending the investor to a fake regulatory agency website that has been developed specifically to stage the fraudulent investment. They know that people as a rule believe what they read on the Internet and that by directing investors to read their fraudulent Web site, a false sense of assurance is given to the investor. Information presented that looks authentic and "official" acts to convince the unsuspecting investor that the investment is safe. Today, anyone can cut and paste information and create sites that contain fake versions of an official seal and agency logo. A fake phone number is provided for the regulatory agency, purportedly allowing for the confirmation of the authenticity of the investment. That fake number only directs the investor to one of the fraudsters, not the agency it names. False information about the investment is given so the investors may invest in the scam. 

Investors are advised to do a few things to avoid being hurt by a scam artist. One phone call to the real state securities regulator can save a lot of money and possibly one's future dreams. Several steps are wise to consider: 

Deal only with advisers and broker-dealers who are reputable and properly registered.
Stay away from "no risk" or "guaranteed" investments. 

Get written information and don't take everything you hear or read as being true.
But the first step to make is that one call to contact the securities regulator. In New Jersey, it's the Bureau of Securities of the Office of the Attorney General. Investors can obtain information that may help in making more rational, informed decisions. Answers to questions such as if the investment is registered, if the person is registered, what is the disciplinary history of the person or firm (that is, whether any civil, criminal or administrative proceedings have been brought against the person). 

Do not get into dialogue with anyone sending you unsolicited information by e-mail or phone or by contacting them as a result of something received in the mail about an investment. Unsolicited contacts are dangerous for a lot of reasons and what could appear to be a good honest connection or a developing friendship, can be just the beginning of becoming a victim of a scam. Don't send anyone "fees" or "taxes due" with promises of getting money sent to you. 

By calling the Bureau of Securities, you might learn you are just one of many who have been targeted by a particular scam. You could have been the next potential victim but you made the call first. Investors can reach the Bureau to ask about investment concerns at 1-866-I-INVEST and get information - true information -- about the potential investment, before sending that check. 

The Bureau's mission is to protect investors. The Bureau regulates anyone selling securities into or from New Jersey and can provide you, the investor, with free background information about the firms, the investments and people nationwide who sell them. Check out the Bureau's Web site: www.njsecurities.gov. Calls can be made toll free to: 1-866-I-INVEST or 1-973-504-3600. Questions can be e-mailed to: askbureauofsecurities@lps.state.nj.us. 

The New Jersey Bureau of Securities does not make any recommendations for specific investments or referrals for financial advisers, individual agents or broker-dealers.