The SEC's Office of Investor Education and Advocacy is issuing this Investor Alert to provide investors with an overview of fraudulent schemes that may be carried out through radio programs.
Many people listen to radio programs that discuss investments. Some of these programs address general topics, such as which types of stocks, bonds, or funds might make good investments. Others may provide commentary and analysis about particular companies, investment products, or financial trends.
While many radio programs are legitimate and operate within the law, a radio program also could be part of a fraudulent scheme designed to deceive investors or the public at large. For example, a radio program might claim to be a source of unbiased information when, in fact, the program sponsor or broadcaster stands to profit if the program convinces investors to buy or sell a particular stock. Even if you do not give the radio program sponsor or broadcaster any money to invest, the sponsor or broadcaster still could profit from your trading activity. For example, you might purchase a stock (causing the stock price to rise), and then the broadcaster might sell its shares of that stock (profiting from the rise in the price of the stock at your expense).
A radio program could be involved in numerous types of investment frauds. Examples include:
Touting - promoting a security without properly disclosing compensation received by the radio program sponsors or broadcasters for promoting the stock.
"Pump and dump" schemes - inflating a company's stock price by making false and misleading statements about the company to create a buying frenzy and then selling the stock at the inflated price.
Scalping - recommending a stock to drive up the stock price and then selling shares of the stock at the inflated prices to generate profits.
Failing to disclose conflicts of interest - falsely claiming to provide an independent analysis or failing to explain a conflict of interest or bias, including financial incentives, that may influence a given investment recommendation.
Fraudulent unregistered offerings - under the federal securities laws, a company that offers to sell its securities must register the offering with the SEC, unless a registration exemption applies. Fraudsters may use unregistered offerings to conduct investment scams by, among other things, claiming that investors can obtain high returns by taking little or no risk, and by using aggressive sales tactics.
Making false performance claims - misrepresenting the track record of the radio show's investment recommendations and using nonstandard benchmarks as a point of comparison.
Ponzi schemes - an investment fraud that involves the payment of purported investment returns to existing investors, but the purported returns are actually from funds contributed by new investors.
If a radio program promotes a particular stock or investment opportunity, listen carefully to what the program says about compensation it receives. Be on the lookout for the following red flags:
No disclosures. Be suspicious if the radio program does not disclose that the program sponsor or broadcaster received any compensation for promoting a specific investment.
Vague disclosures. Be skeptical of radio programs that do not specifically disclose any compensation the program sponsor or broadcaster received, who compensated them, the compensation amount, and the type of compensation payment. The following vague statements described raise red flags:
"From time to time, the radio program may receive compensation from the companies we discuss."
"From time to time, the radio program or its sponsors or staff may hold stock in some of the companies we discuss."
"The radio program receives fees from the companies we discuss."
Buried disclosures. Be suspicious if the radio program's disclosures are made at the end of the broadcast or at a lower sound level than the rest of the broadcast.
Questions about your stock purchases. If you call the radio program or if the program sponsor otherwise obtains identifying information about you, be careful if a person associated with the radio program later asks you detailed questions about your stock purchases, like how many shares did you buy, when did you buy the shares, or which broker did you use to buy the shares.
Even if a radio program does disclose that it received compensation for promoting a stock, be aware that fraudsters may make those disclosures to create the false impression that the radio program is legitimate - to promote investor confidence in the program's recommendations and to try to obtain profits from later trading activity.
Signs of a Potential Investment Scam
Fraudsters also may use radio programs as a way to establish an air of legitimacy that would persuade individuals to invest in fraudulent schemes. Or, they may use them to get their feet in investors' doors to make fraudulent investment pitches by phone or in person. Be careful if someone tries to persuade you to listen to a radio program and then later contacts you directly with specific investment recommendations. When considering any potential investment, watch out for these potential warning signs of investment fraud:
Promises of high investment returns. Be highly suspicious if the promoter guarantees you a high rate of return on your investment. In fact, any sort of guaranteed return should trigger skepticism because all investments have some risk.
Pressure to buy RIGHT NOW. Be skeptical if the promoter pitches the investment as a "limited time only" opportunity, especially if the promoter claims to base the recommendation on "inside" or confidential information.
Sounds too good to be true. Exercise caution if the investment sounds too good to be true. Investments providing higher returns typically involve more risk.
Bogus Credentials / Business Experience. One way that a fraudster "tricks" investors into giving the fraudster money or access to their money is to create bogus credentials and /or business experience. Claims of certifications, degrees, training, and previous work experience can be used to lull potential investors and clients into a false sense of trust. Many of these kinds of claims can be verified by investigation. See, e.g., FINRA Professional Designations Database to decode the letters that a financial professional may include at the end of the professional's name and to identify the organization, if any, that issues the claimed credential or designation ( the database includes a disclaimer that FINRA does not endorse any professional credential or designation).
Complex products and strategies. Investors should be wary of trading strategies or financial products that are too complex to explain or understand. Fraudsters may use complex products and strategies to defraud investors.
Investigate the Program and the Program's Associated Persons
A number of tools are available to assist you in investigating radio programs and persons associated with them:
Some entities that sponsor or broadcast radio programs are registered with the SEC as investment advisers (http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx) and have certain responsibilities and obligations (http://www.sec.gov/divisions/investment/advoverview.htm). If a radio program states that it is not broadcast or sponsored by a registered investment adviser, keep in mind that the entity broadcasting or sponsoring the program is attempting to deny that it is subject to the responsibilities and obligations of an investment adviser. Radio program sponsors or broadcasters may be registered broker-dealers and their radio programs are subject to other regulatory requirements. See Fast Answers: Broker-Dealer Registration for information about brokers and links to additional broker information.
Before making any investment, independently and thoroughly investigate the investment opportunity. For more information about how to evaluate a potential investment, read our publication Ask Questions.
OCIE-FINRA Report on National Senior Investor Initiative (pdf) (Report discusses FINRA rules that apply to public appearances by persons associated with broker-dealers, which include sponsoring or participating in a radio interview, or otherwise engaging in public appearances. Staff identified potential rule violations involving misleading advertisements and the failure to properly supervise the content of radio shows.)
The Office of Investor Education and Advocacy has 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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