Investor Alert: Investment Newsletters Used as Tools for Fraud

from the Securities and Exchange Commission

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help investors avoid fraudulent schemes that may be carried out through investment newsletters.

Investment newsletters come in many forms. They may be found online or in hard copy; they may be available for a fee or free of charge. Some newsletters address general securities 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 investment newsletters are legitimate, some are used to carry out schemes designed to deceive investors. Such schemes can include:

• Touting – promoting a stock without properly disclosing compensation received for promoting the stock.
• “Pump and dump” schemes – pumping up a company’s stock price by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price.
• Scalping – recommending a stock to drive up the stock price and then selling shares of the stock at inflated prices to generate profits.
• Undisclosed conflicts of interest – falsely claiming to provide independent analysis or failing to explain conflicts of interest (or biases), including financial incentives, that may influence the investment recommendations.
• False performance claims – misrepresenting the track record of the newsletter’s investment recommendations.

Some investment newsletters claim to be sources of unbiased information, when in fact the newsletter publisher will make a lot of money if the newsletter convinces investors to buy or sell particular stocks. Do not take comfort because a newsletter encourages you to purchase or sell a stock through your own brokerage account. Even if you do not give the newsletter publisher any money to place trades for you, the newsletter publisher may profit from your trading activity. For example, you may purchase a stock (causing the stock price to rise) and then the newsletter publisher may sell its shares of that stock (profiting at your expense).

If a newsletter promotes a particular stock, read carefully what the newsletter says about compensation it receives and look for these red flags:

• No disclosures. Be suspicious if the newsletter does not disclose having received any compensation.
• Vague disclosures. Be skeptical of newsletters that do not specifically disclose who paid them, the amount, and the type of payment. The following examples raise red flags because they do not contain specific information:

“From time to time, the Newsletter may receive compensation from companies we write about.”

“From time to time, the Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about.”

“The Newsletter receives fees from the companies we write about.”

• Buried disclosures. Be wary if the newsletter’s disclosures are difficult to find or appear in tiny, hard-to-read print.
• Questions about your stock purchases. Be careful if a newsletter representative asks you detailed questions about your stock purchases like how many shares you bought, when you purchased the shares, or which broker you used to buy the shares. The newsletter publisher may make money based on the amount of shares its subscribers buy.

Even if a newsletter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may include such disclosures to create the false appearance that the newsletter is legitimate.

Fraudsters may also use newsletters as a way to get their foot in the door to pitch fraudulent investments by phone. Be careful if someone tries to get you to subscribe to a newsletter and then calls you with specific investment recommendations.

When considering any potential investment, watch out for these 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.
• 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.

Investigate the Investment Newsletter

Search SEC.gov and contact your state securities regulator to see if any regulatory actions have been taken against the investment newsletter or anyone associated with it.

Use the SEC’s IAPD website or the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck website to check the background, including registration or license status and disciplinary history, of any individual or firm recommending a stock. Some entities that issue investment newsletters are registered with the SEC as investment advisers and have certain responsibilities and obligations. If a newsletter provides a disclaimer stating that it is not published by a registered investment adviser, keep in mind that the entity issuing the newsletter is disclaiming these responsibilities and obligations.

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Before making any investment based on information in an investment newsletter, independently and thoroughly investigate the investment opportunity. For more information about how to evaluate a potential investment, read our publication Ask Questions.

Additional Resources

Investor Alert: Don’t Trade on Pump-And-Dump Stock Emails
Investor Alert: Social Media and Investing – Avoiding Fraud
Microcap Fraud Spotlight
Microcap Stock: A Guide for Investors

Contact the SEC on SEC.gov:

Report possible securities fraud.
Report a problem.
Ask a question.

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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.