Washington State Department of Financial Institutions

SIPC Issues Warning About Web-based "Brokerage Identity Theft" Scams Targeting Investors

WASHINGTON, D.C. - December 11, 2003 - Investors and brokers need to be on their guard against a new fraud scheme in which con artists are falsely posing on the Web as authentic brokerage firms that are members of the Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund to protect the customers of insolvent brokerage firms.  In the wake of receiving more than a dozen complaints from U.S. and overseas fraud victims hit by this new form of "brokerage identity theft," SIPC today issued a public warning and also announced that it has forwarded files to the U.S. Securities and Exchange Commission (SEC) and the North American Securities Administrators Association, Inc. (NASAA) documenting instances of this new form of fraud.  (Go here for a list of companies claiming to be located in Washington or having business in Washington that may be involved in securities-related fraud.)

 

Here's how the scheme usually works:  Con artists set up a Web site that uses the name of an actual SIPC member brokerage firm, but with a different address.  In other cases, the party committing the fraud uses the name (and, in some cases, the address) of an actual registered broker, and then sets up a bogus entity using that person's name and address.  The fictional internet entity claims to be a long established and respected brokerage firm, and a member of SIPC.  The victim is often told to check the membership database on SIPC's Web site, in order to "prove" that the firm is a SIPC member, when in fact the fictional firm has simply stolen the identity of a real SIPC member. 

 

SIPC President Stephen Harbeck said:  "SIPC has recently received information from more than a dozen U.S. and non-U.S. victims of this type of fraud.  Experience tells us that most investors who lose money never follow up with a regulatory authority. So, we believe that the complaints we are seeing are just the tip of an iceberg.  In addition to issuing this warning, we have sent our files to state and federal securities regulators in the hopes of identifying and shutting down these 'brokerage ID theft' rings."

 

NASAA President and Connecticut Securities Director Ralph A. Lambiase said: "Brokerage identity theft joins a long list of scams that rely on the Internet to stalk millions of potential victims at minimal cost.  Identity theft is inherently difficult to detect. For that reason alone, investors should refuse any unsolicited online contact from anyone seeking personal information or money by simply hitting the delete key.  I urge investors to contact their state securities regulator if they suspect they have been defrauded by this scheme."

 

Harbeck noted that some of the schemes result in the "brokerage ID theft" ring simply offering a security for sale, taking in investor funds (often by wire transfer) and then vanishing.  In more elaborate schemes, the con artists contact a shareholder of a thinly traded security.  They tell the shareholder to refer to the SIPC Web site as "proof" of the good standing of his fictional brokerage firm.  The con artist then offers to buy the thinly traded security at an attractive price.  The phony broker may pretend to represent an unnamed party seeking to obtain a controlling interest in the thinly traded corporate shares. The shares have often declined to virtually no value in the open market, and consequently the shareholder is pleased to hear that a potential buyer exists.  But the offer comes with a catch.  The seller must make a substantial "good faith deposit" prior to the sale.  When no sale by the unnamed party is made, the seller is often told a nonsensical story by e-mail, to the effect that the SEC has "declared a moratorium on all accounting-based trades," or that the SEC has "rejected the trade," or, in one case reported to SIPC, that the buyer has contracted cholera.

 

Another variation of this ID theft scheme involves telling the victim that their thinly traded, valueless shares can be used as a "deposit" or "down payment" for the purchase of a larger, well-known public company, but that there is an additional sum to be paid so as to complete the purchase of shares in the well known company.  Because the "down payment" supposedly values the thinly traded securities at a premium, the deal appears attractive to the victim.  Once the down payment is wired to the con artist, the victim never hears from the fictitious brokerage firm again. 

 

To date, SIPC has seen evidence of victims in the United States, Canada, Norway, Sweden, Denmark, the Netherlands, South Africa, Singapore and Australia within the last few months.

SIPC Tips for Investors

1.  Remember: If it sounds too good to be true, it probably is too good to be true.  Ask yourself why would someone pay you a premium for your dormant, poorly performing investment?  You should proceed with extreme caution any time someone tells you something as odd as the notion that a person who owns a security has to put up a deposit in order to sell the security.

 

2.  Prior to dealing with any broker or brokerage firm for the first time, do your homework.   Check out the brokerage firm and broker by contacting your state securities regulator or by going online to the National Association of Securities Dealers BrokerCheck.

 

3.  If you have fallen victim to a brokerage identity theft scheme or been contacted by one, contact regulators.  Contact the SEC at enforcement@sec.gov or your state securities agency.  To reach the State of Washington Department of Financial Institutions Division of Securities, call (360)902-8760 in Olympia, or call 1-877-RING DFI (1-877-746-4334). Make sure to document your complaint. Harbeck, SIPC's President, noted that victims need to put their complaints in writing, either on paper or electronically.  "Telephone calls are only worth the paper they are written on.  A regulator needs to see documentation in order to act."

 

4.  Educate yourself about investment fraud.  SIPC's Web site, www.sipc.org, offers "Protecting Yourself Against Fraud" at http://www.sipc.org/yourself.html. The SIPC Web site page features links to some of the best anti-fraud information for investors.

 

5.  Remember that SIPC cannot protect you against fraud.  SIPC's role is limited to returning the cash and securities in your account with a SIPC member brokerage firm in the event that the firm becomes bankrupt.  SIPC cannot return your purchase price if any investment you make loses money.  To read about SIPC's limited role in investor protection, go to "How SIPC Protects Investors" at http://www.sipc.org/sipcprotects.html.

 

SIPC Tips for Brokerage Firms

1.  Search the Internet on a regular basis for misuse of your corporate name, and work aggressively with regulators to eliminate any misuse you discover.  Brokerage firms that do not generally deal with the public are particularly vulnerable, because such firms often do not have a Web site of their own.

 

2.  If an investor inquires about your firm's supposed participation in such a bogus transaction, don't simply inform the investor that your firm is not involved.  Report the matter immediately to the SEC at enforcement@sec.gov, to your self regulatory organization, and to the relevant state securities regulator.  Urge the investor to do so as well.  Your report could disclose an ongoing fraud scheme or even a bigger pattern of swindles.

About SIPC

From its creation by Congress in 1970 through December 2001, SIPC has advanced $513 million in order to make possible the recovery of $14.0 billion in assets for an estimated 622,000 investors. SIPC estimates that more than 99 percent of eligible investors have been made whole in the failed brokerage firm cases that it has handled to date.

 

SIPC is an important part of the overall system of investor protection in the United States. While a number of federal, self-regulatory and state securities agencies deal with cases of investment fraud, SIPC's focus is both different and narrow: Restoring funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. SIPC was not chartered by Congress to combat fraud.

 

SIPC either acts as trustee or works with an independent court-appointed trustee in a fraud case to recover funds. The statute that created SIPC rules provides that customers of a failed brokerage firm receive all non-negotiable securities that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.

 

Contact: Christine Kraly, The Hastings Group, (703) 276-3258 or ckraly@hastingsgroup.com.