RegulationJune 16, 2020

SEC Swats Away COVID-19 Scammers

Pandemic keeps regulator busy protecting investors from flood of fraudulent claims.

Reported by Michael Katz

The pandemic has kept the US Securities and Exchange Commission (SEC) busy tracking down and charging scammers who are using COVID-19 to swindle investors. The regulator has halted trading in dozens of stocks in connection with COVID-19, and has brought charges in several alleged coronavirus scams, including allegations of misleading claims, manipulative trading schemes, and other scams.

“As many of us are focused on supporting our families, friends, and neighbors during this difficult time, some fraudsters are seeking to use the COVID-19 crisis as a basis for investment scams,” Marc Berger, director of the SEC’s New York Regional Office, said in a statement.

The SEC has issued an investor alert about fraudulent scams related to COVID-19, which it updates periodically, and later this month the New York Regional Office will host an educational telephone town hall about avoiding scams related to COVID-19. Joining SEC officials at the town hall will be US Attorney for the District of New Jersey Craig Carpenito and Gerri Walsh, president of the Financial Industry Regulatory Authority (FINRA) Foundation.

The SEC’s Office of Investor Education and Advocacy and the Division of Enforcement’s Retail Strategy Task Force are also warning investors about the red flags that can indicate fraud relating to COVID-19.

“We have become aware of a number of stock promotions, including online and through unsolicited phone calls, claiming that products or services of publicly traded companies can prevent, detect, or cure COVID-19, and that the stock of these companies will dramatically increase in value as a result,” the SEC said. “If you are considering investing in a company, especially in a microcap or penny stock, be skeptical of claims that products or services can prevent, detect, or treat COVID-19, or help to solve issues resulting from the current pandemic.”

Scammers are also promoting rumors on social media, on online bulletin boards, and in chat rooms. False claims also might concern companies converting operations to COVID-19-related support, or legislative relief packages and related industries that supposedly benefit from the crisis.

The regulator said false claims about a company’s products and services are sometimes part of a “pump-and-dump” scheme, and that microcap stocks may be particularly vulnerable to these because they often have limited public information, which can make it easier to spread false information and move the price of a stock to take advantage of the public.

Many investment frauds also involve unlicensed individuals or unregistered firms, so the SEC strongly recommends verifying that a seller is currently registered or licensed using the free search tools on Investor.gov.

In addition to luring victims looking to make money on investments, the SEC also warns that some COVID-19-related scams will attempt to appeal to an investor’s desire to help others by using charitable causes as a hook for investment scams. For example, they may pretend that your investment will provide financial support or medical treatment to people in need as a result of the COVID-19 pandemic and then steal your money instead.

The SEC said investors considering participating in an investment offered by a charity that claims to be a tax-exempt or “501(c)(3)” organization should check out the organization’s tax status on the Tax Exempt Organization Search on the IRS website. Even if a charity has 501(c)(3) status, this does not mean the investment is a legitimate opportunity—it still could be part of a fraudulent scheme, the SEC warns.