The Investor Alert, released by the SEC’s Office of Investor Education and Advocacy, highlights the unique dangers investors face when evaluating investment prospects and making investment decisions via social media platforms or over the internet. In particular, the alert warns investors that investment information portrayed on social media may be “inaccurate, incomplete, or misleading.” [1]

Furthermore, the alert cautions that the broad-reaching and low-cost nature of social media can create “false impression of consensus or legitimacy” of investment prospects, creating the illusion that far more people are making the investment than truly are. [1]

More specifically, the Investment Alert sheds light on several common schemes used by fraudsters to target and take advantage of unsuspecting investors online. These schemes include impersonation schemes, “crypto” investment scams, and romance scams. [1]

Impersonation schemes are often, and easily, perpetrated over social media because social media platforms allow fraudsters to create false or misleading profiles. [1] For example, a fraudster might create a social media account impersonating a legitimate broker or investment adviser. [1] The fraudster can then use their false identity to convince investors to make investment decisions which enrich the fraudster at the investor’s expense.

As a result, social media users should be wary of investment opportunities communicated solely over social media platforms. Investors are urged to look out for typos within a supposed broker or adviser’s profile page or messages, as well as by considering whether or not the social media platform has “verified” the user as person they claim to be. [1]

Crypto investment scams are also on the rise, given the continued popularity of cryptocurrencies and their relative novelty. These scams often sound “too good to be true” and may take the form of a Ponzi or pyramid scheme involving crypto or the blockchain, promising low or no risk with high investment returns. [1] If an investor chooses to invest in cryptocurrency, the credentials of the investment opportunity can be investigated by using the search tool provided by the investor.gov website. [1]

Finally, online romance scams have also become increasingly prevalent in recent years. This type of scheme typically starts with a fake dating app or social media profile, which reaches out to a victim to begin the trust-building process. Once a relationship of trust has been created, the fraudster behind the fake profile will begin to inform the victim about supposedly lucrative cryptocurrency or other investment opportunities. [1]

Because trust has been built over time, victims may be more likely to believe the fraudster and funnel their hard earned money into one of these fraudulent investment scams.

Along with providing background information on each of the fraudulent schemes discussed here, the SEC’s Investment Alert provide additional information on market manipulation schemes and community-based investment fraud schemes. [1]

The overarching takeaway from this Investor Alert is clear: fraudsters are increasingly using social media and other online platforms to take advantage of unsuspecting investors, and their schemes are only becoming more creative.

Investors should remember that online platforms allow fraudsters to easily fabricate and disperse misleading investment information to the masses. Often, the best way to protect an investment is through careful research into any investment opportunity. Per the Investor Alert, a heavy dose of skepticism when an opportunity sounds “too good to be true” goes a long way.

If you have a question or concern about an existing investment or investment opportunity, reach out to the attorneys at Savage-Villoch law.

Sources: [1] https://www.sec.gov/oiea/investor-alerts-and-bulletins/social-media-and-investment-fraud-investor-alert

The eleven defendants include Forsage’s four founders as well as several “promoters” of the Forsage scheme. [2] The SEC’s complaint notes that to date, more than $300 million worth of transactions have occurred via Forsage smart contracts, despite the fact that the retail investors powering this scheme have received no good or service of value in return for their “investments.” [2]

Forsage is a classic pyramid scheme in that those at the top – namely the founders and promoters charged by the SEC – stood to gain the most wealth, especially as others joined the scheme after them. In fact, a recent scholarly report on the scheme found that more than 88% of Forsage users incurred net losses on their investments with the platform, with those at the top generating massive gains. [3]

While Forsage was promoted as an “income-generating opportunity” with impressive returns, the SEC alleges that the founders and promoters were well aware that their monetary gains were far higher than, and would be unattainable to, the retail investors they recruited. [2]

The Forsage scheme functioned exactly like a pyramid and Ponzi scheme, as wealth was almost exclusively generated through recruitment of additional “investors.” When an investor joined Forsage, the first step was to create a crypto-asset wallet, which was assigned a sequential Forsage ID. [2] The higher the Forsage ID, the later the investor had joined the scheme, and in turn, the lower returns an investor could actually expect to generate. [2]

Once an investor created their crypto-asset wallet, they could begin purchasing “slots” within Forsage’s smart contracts. [2] The purchase of a slot did not allocate any good or service of value to the investor. Instead, each slot purchased broadened the investor’s compensation earned from both new Forsage recruits and from existing members of the Forsage community. [2]

Upon purchasing a slot, the algorithm-based Forsage smart contracts would automatically direct crypto funds to the investor’s crypto-asset wallet whenever the investor recruited additional investors to join the scheme. [2] The smart contracts also automatically directed shares of funds from the broader Forsage community as a form of profit-sharing. [2]

A Forsage investor could not join the scheme without sending currency, in the form of Ether, over the platform. [3] In line with the structure of the Forsage smart contract code, currency sent by a new investor was automatically sent first to existing investors with lower Forsage IDs, thereby allowing those who had joined earliest to obtain the highest returns. [3]

The SEC’s complaint categorizes the slots within Forsage’s smart contracts as investment contracts which constituted securities. [2] These securities were not registered with the SEC. [2] As a result, the SEC alleges several violations of federal securities law, concluding that the founders and promoters were engaged in the unauthorized offer or sale of securities. [2]

This type of scheme is especially dangerous to unwitting investors because of the relative novelty of the cryptocurrency sector, along with the inability of law enforcement authorities to intervene and halt a scheme which is hosted over the decentralized blockchain. [4]

Additionally, hosting a scheme like this one over the blockchain affords the organizers the luxury of anonymity, something that would not be possible for organizers of a traditional pyramid or Ponzi scheme. [4]

Investors are urged to carefully evaluate their investment prospects to avoid falling prey to a cryptocurrency pyramid or Ponzi scheme like Forsage. While tales of high returns can be tempting, these schemes are specifically designed to trick investors into believing they will see returns that they won’t, while instead buffering the wallets of those who “invested” before them.

If you have questions or concerns about a potential cryptocurrency pyramid or Ponzi scheme, please reach out to the trusted attorneys at Savage Villoch law.

Sources: [1] https://www.sec.gov/news/press-release/2022-134 [2] https://www.sec.gov/litigation/complaints/2022/comp-pr2022-134.pdf [3] https://arxiv.org/pdf/2105.04380.pdf [4] https://www.coindesk.com/layer2/2022/08/08/how-to-stop-forsage-meta-force-and-other-smart-contract-pyramid-schemes/

In total, the number of new enforcement actions filed by the SEC in FY 2021 increased by 7% over the previous year, with 434 new enforcement actions. While the total number of enforcement actions – including new actions along with other “follow-on” or open proceedings – decreased slightly year over year in FY 2021, the SEC remained committed to its role as “cop on the beat for America’s securities laws,” as described by Chair Gary Gensler. [1] The SEC maintained a sharp focus on protecting the integrity of the country’s capital markets through enforcement actions against bad actors even in the face of the persisting COVID-19 pandemic persisted.

In announcing its progress on enforcement actions during FY 2021, the SEC concentrated on several key priority areas. Some of these priority areas, per a recent SEC Press Release, included “holding individuals accountable,” “ensuring gatekeepers live up to their obligations,” “rooting out misconduct in crypto,” “policing financial fraud and issuer disclosure,” “cracking down on insider trading and market manipulation,” and “swiftly acting to protect investors.” [1]

While focusing on “holding individuals accountable,” the SEC noted that during FY 2021, it successfully lodged charges against top-level executives of corporate powerhouses. including CEOs at both Wells Fargo and Nikola, an alternative-fuel trucking company. [1]

In “ensuring gatekeepers live up to their obligations,” the SEC focused its attention on auditors and attorneys from various backgrounds who had behaved improperly, unprofessionally, or failed in their duties when auditing other companies. [1]

The SEC was able to further its “rooting out misconduct in crypto,” objective by carefully studying misconduct within the emerging cryptocurrency market, and subsequently charging both entities and individuals who fraudulently offered digital asset securities, such as bitcoin, thereby defrauding investors. [1] These actions garnered particular concern, given the largely unregulated state of the cryptocurrency space.

Beyond cryptocurrency concerns, the SEC also proved its focus on “policing financial fraud and issuer disclosure,” by continuing to diligently trace potentially fraudulent activities within the market. In doing so, the SEC uncovered possible violations of securities laws, and also investigated disclosures made by public companies which improperly failed to note potential COVID-19 pandemic impacts on their businesses. [1]

During FY 2021 the SEC also had its eyes on “cracking down on insider trading and market manipulation” by pursuing charges for insider trading relating to a biopharmaceutical company acquired by COVID-19 vaccine manufacturer Pfizer, Inc., as well as an insider trading ring connected to confidential data regarding Netflix’s subscriber growth over time. [1]

In pursing its myriad enforcement actions, the SEC also focused on “swiftly acting to protect investors” throughout FY 2021. Many cases involved the SEC filing emergency actions or restraining orders against defendants in Ponzi schemes, as well as suspending trading of more than 20 “meme stocks,” as concerns about market volatility reached a head in early 2021. [1]

In all, the SEC’s FY 2021 enforcement actions resulted in obtaining “judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties.” [1] Furthermore, FY 2021 was the highest year ever for whistleblower awards, as the whistleblower program awarded $564 million to just over 100 whistleblowers, and surpassed $1 billion in lifetime awards paid out. [1]

As the world rebuilds and adapts to life in the midst of a global pandemic, the SEC looks poised to continue its work in closely monitoring and enforcing federal securities laws through enforcement actions, with the ultimate aim of protecting not only capital markets, but also investors of all backgrounds.

Sources: [1] https://www.sec.gov/news/press-release/2021-238

The complaint alleges that Garcia has been operating a Ponzi scheme in which she has taken upwards of $70 million from over 2,000 investors under the guise that the investments funded Merchant Cash Advances (MCAs) for small businesses in need. Instead, the complaint alleges, the investments are being used in a “classic Ponzi scheme fashion” not to fund MCAs, but to pay the “returns” of investors before them. [2]

While MJ Taxes has been in existence since 2016, MJ Capital Funding was formed in June 2020, after the COVID-19 pandemic had already taken hold. From June until October 2020, MJ Taxes solicited six-month investments which typically promised a 10% monthly return, extrapolated out to substantial 120% annual returns. MJ Capital took over in October 2020, continuing to advertise as a source for MCAs while promising investors large and consistent returns.

MCAs provide small businesses who may not otherwise be able to obtain loans with quick access to needed funds. The MCA provides a set amount of money to the small business in exchange for a percentage of their daily income over a stipulated period of time. Considering the difficulties posed by the COVID-19 pandemic on small businesses, MJ Capital’s investors may well have represented a sympathetic group, hoping to offer a hand to small businesses in need while benefiting from exorbitant returns for themselves.

The SEC’s complaint alleges that MJ Capital has funded only a minimal number of MCAs since June 2020, instead using its investors money to both pay off existing investors and to pay for marketing and sales agents which advertise the company’s purported operations.

Situations like this one pose a unique danger to retail investors, one that the SEC is well aware of and has pledged to diligently investigate. While the SEC was granted emergency relief following the filing of their complaint, they are also seeking permanent injunctions and a civil penalty from the defendants, among other forms of relief. The complaint alleges eight federal counts against the defendants – five violations of the Securities Act and three violations of the Exchange Act. [1]

Florida has long been a hotspot for Ponzi schemes, and its important for all interested investors to keep a careful eye on how their hard-earned money is being invested. To protect yourself from potential Ponzi schemes, there are a few factors to be aware of. Typically, when an investment sounds too good to be true, i.e. offering very high and consistent returns, it likely is too good to be true. Be wary of such investment offers and consider soliciting advice from a trusted and unbiased professional.

It is also important to be on the lookout for investment opportunities that promise to make a lot of money without properly explaining how that money will be made. These situations may be another red flag of a potential Ponzi scheme and warrant careful consultation with your trusted advisor or attorney.

If you have any questions or think your investments may have been impacted by a Ponzi scheme, our attorneys are here to advise. Please reach out for a consultation.

Sources:

[1] https://www.sec.gov/litigation/complaints/2021/comp-pr2021-151.pdf

[2] https://www.sec.gov/news/press-release/2021-151