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The Fraud Examiner

 

Friend or Fraudster? How Scams Are Plugged Through Social Media

 


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May 2012

By Catherine Lofland, CPA


How well do you really know your abundance of Facebook "friends"? How about your LinkedIn connections and the people you follow on Twitter? Many social media users are connected to people they have never met or barely know, and now these so-called friends and connections not only have access to your personal information, but they also have the ability to send you personalized and private messages.


Additionally, these sites frequently allow you to observe the activity of your friends and vice versa. Since we typically trust our friends, it makes sense that we would be open to checking out products or services they are using. Users of social media instinctively let their guard down when it comes to interacting with people in their online networks, and people who might be strangers in reality become familiar online.


Affinity fraud refers to investment scams that target members of identifiable groups, such as a church, alumni association, or professional organization. Online versions of these groups are often easy to join, and scammers purposefully infiltrate them to establish a bond with their victims. The false sense of security created by these online connections coupled with the ability to contact many different people at a relatively low cost makes social media sites easy outlets for fraudsters to tout their schemes.

 

Facebook  

Facebook is one of the most popular websites on the Internet today and boasts more than 900 million active users as of April 2012. Individuals, organizations, and companies can create profiles and add others as friends, exchange messages (both private and public) and advertise products and services. Users can also join common-interest groups.


Fraudsters can use Facebook to set up phony profiles to perpetrate their schemes. Since many people put details about themselves and their families on the Internet, it might be simple for someone to set up a phony profile pretending to be a relative, such as your Uncle Joe. Alternatively, the fraudster might be able to hack into Uncle Joe’s actual profile by figuring out his password. A common scheme is for someone to impersonate a close friend or relative (in this example, Uncle Joe), and contact the victim. Uncle Joe then claims that he knows someone who just died, and they have millions of dollars in the bank. This deceased person’s widow needs your help to move the money out of a Nigerian bank. The scheme continues on as the classic 419 fraud or advance-fee fraud.

 

LinkedIn
LinkedIn is a professional networking site with over 161 million members around the globe. Users are linked to each other by becoming "connections," and users can invite anyone to connect with them. The invitee must accept the invitation in order to establish the connection, and from there the two users are in each other’s networks. Many professional organizations, interest groups, and companies also make group profiles on the site that users can join. Some of these groups restrict their membership, while others are open to anyone. These groups have discussion boards that allow members to communicate.


In January 2012, Illinois-based investment advisor Anthony Fields was accused by the SEC of offering more than $500 billion in fictitious securities through LinkedIn and other social media websites using his two sole proprietorships — Anthony Fields & Associates and Platinum Securities Brokers. He allegedly promoted fictitious bank guarantees and medium-term notes on group discussion boards. Fields was able to target likely investors by strategically choosing which groups to tout his securities to. When group members see such investment opportunities advertised, many are inclined to think they are legitimate since they are posted by alleged colleagues. Fields’ postings generated interest from several potential customers, but fortunately the SEC put a stop to his operations before anyone fell for the schemes.

 

Twitter 

Twitter is a social networking service that enables users to post and read brief messages called tweets. Users can choose to keep their tweets public or private. Public tweets can be viewed by both registered and non-registered users of the site. Twitter reportedly generates over 340 million tweets daily. The site does not display advertising, but users wishing to advertise can target potential customers based on the Twitter accounts they follow or their history of tweets.


Twitter is especially vulnerable to pump-and-dump schemes, in which a company’s stock (typically a small company) is hyped through false and misleading statements to the marketplace. A fraudster might post a tweet urging readers to buy a stock quickly or to sell before the price plummets. These fraudsters might claim to have inside information about the company, when in reality, they are paid promoters who plan to sell their significant share of the company after the stock price is "pumped" up by the buying frenzy. Once the fraudsters "dump" their shares, the price typically falls, and investors lose their money.


In January 2011, rapper 50 Cent posted tweets to his 3.8 million followers advising them to invest in H&H Imports, a penny stock of which he owned 30 million shares. The stock was valued at $0.10 before the tweets began, and went up to $0.39 after 50 Cent touted the company’s success and boasted to his followers they could double their money if they invested. The rapper could apparently cash out at different intervals, and if the stock reached $0.50, he would make $12 million. However, the company turned out to be a money-losing venture with over $3 million in debt, and its auditors expressed doubt about its ability to continue as a going concern.


YouTube
YouTube is a popular website where users upload, view, and share videos. Most of the content is uploaded by individuals, but corporations and other organizations also commonly upload content to the site for promotional purposes. YouTube claims that its users view over three billion videos every day.


YouTube affords fraudsters the opportunity to upload videos advertising a phony scheme and have it be accessible all over the world. In one such case, Austin-based James Elton Warr promoted the sale of investments in a fraudulent real estate program using YouTube. In his videos, Warr boasted his program was a safe and lucrative alternative to the stock and bond markets and guaranteed investors an annual return of eight percent. In reality, only about half of the money was used to buy real estate notes, while the rest was used to pay commissions to salespeople, for restaurant and travel expenses, and to purchase a Mercedes. Warr, who is not licensed to sell securities in Texas, managed to defraud at least $972,000 from 30 investors before authorities shut down his operation and froze his assets.


Red Flags of Common Scams 

The investment opportunity promises "guaranteed" returns.

The opportunity is described as "once-in-a-lifetime," or pressures you to buy immediately.

The deal sounds too good to be true. Compare any promised return with the returns on well-known stock indexes.

The investment offer was unsolicited.

You are unable to find any public information about the investment opportunity.

The opportunities or people touting them are located outside of the United States.

You do not know the person who is contacting you, or they are just an acquaintance.

 

 Tips for Using Social Media Outlets

Familiarize yourself with privacy settings. Often the default privacy settings reveal more information than you might want to share with your entire network.

Minimize the amount of biographical information you put on your profile. Many sites give you the opportunity to post your full name, address, phone number, email address, and birth date. Be cautious about what you choose to post — do you really want this information accessible to people you don’t know very well?

Be selective about whom you accept as friends and connections. It is not uncommon for fraudsters to send friend requests to people they have never met, and many users are careless as to whom they accept requests from. Be careful not to assume someone is an old acquaintance you’ve simply forgotten; it very well might be a fraudster trying to contact you.

Take steps to safeguard access to your account. Choose passwords that are difficult to detect. Strong passwords are typically at least eight characters in length, with a mixture of letters and numbers and special characters. Use different passwords for different accounts.

Be careful when accessing your account on a public or shared computer or over a wireless network. If you are dealing with any type of sensitive information, it is best to access your accounts on secured networks and private computers.

Do not make an investment decision based solely on the recommendation of a member of an organization or group to which you belong; the investment might be an affinity fraud. Even if you know the person making the investment offer, be sure to ask questions and research the investment before handing over your money.

 

 

While social media can provide many benefits for investors, it also presents countless opportunities for fraudsters. Investors who learn of investing opportunities from social media should always be on the lookout for fraud. If you think you have encountered fraud, contact your state securities regulator to report it.


 

Contact the ACFE
For more information, contact Scott Patterson, Media Relations Specialist
Phone: (512) 478-9000 ext. 156; email: spatterson@acfe.com


 
 

3 Comments

  • Avatar

    Very wise article. It seems the author has throughly analysed the social media and mentioned the ill effects of providing personal information blindly to strangers.
    This article will be very useful to all those who are in the world of social media.

  • Avatar

    What's interesting about this write-up is that it does not do the Social Media a disservice, but focuses on getting its users educated about potential risks. I was a very avid used till the point in time that I heard some companies trace customers through social sites. The possibility of an invasion of privacy has made me wiser in the use of this media. It is a great medium, if carefully used.

  • Avatar

    Very good assessment and analysis. Thanks

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