The US Securities and Exchange Commission is getting in the business of humor. The world’s largest regulator of stock investments, seeking to improve awareness around cryptocurrency-related fraud, recently launched a bogus digital currency website, “HoweyCoins.com,” that touts an “an all too good to be true investment opportunity.” The humorous tone comes amid more serious regulatory warnings at various levels regarding investment fraud.
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One of the most challenging aspects of preventing investing fraud is making investors aware of the problem and realize that it can happen to them, says the CFTC’s Dan Rutherford. As Director of the Office of Customer Education and Outreach at the derivatives regulator, he recognizes the importance of not just delivering stale warnings about investor fraud but creating messages that break through the clutter.
“Most investors don’t think they will be a victim of fraud,” he told ValueWalk in an interview Wednesday. “Much fraud goes unreported because there is a stigma attached to it. They think they are too smart to be a victim.”
The $20 billion theft of customer assets by then respected Wall Street executive Bernie Madoff, which was perpetrated against high net worth individuals and other “sophisticated” investors, stands as a testament to proving that investment fraud can hit anyone. In fact, Rutherford notes that the profile of the average investment fraud victim is male, over 50 years old and a self-directed investor who is successful and often thinks they are “too smart to be a victim.”
To highlight investment fraud prevention, Rutherford has produced a series of slickly produced videos that walk investors through various scams. The goal of the videos is to tell a human story to communicate and draw attention to often dense regulatory issues.
The SEC website, likewise, uses an attention-getting approach to highlight investment fraud techniques. The website makes demonstrably false claims, such that “HoweyCoins are officially registered with the U.S. government” when a quick check of FINRA’s BrokerCheck and the CFTC SmartCheck website reveals that no such registration exists.
Checking the registration of the market participant is the best way to prevent fraud, Rutherford says, noting that a vast majority of independent investors claim to conduct due diligence, but few take the time to check an investment managers background. Any investment that is being sold to the general US public requires that the investment advisor is registered.
Jake Ryan, who recently launched Tradecraft Capital, a cryptocurrency hedge fund targeted only to “qualified investors,” is registered as an exempt fund manager on the FINRA website. He thinks regulation is positive for investors and lends credibility to an industry.
Both the SEC and CFTC see problems with how unregulated websites can quickly pop-up, take customer money and then disappear, mainly when they are overseas.
“Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals,” Owen Donley, Chief Counsel of the SEC’s Office of Investor Education and Advocacy, said in a statement. A recent CFTC video, likewise, details how scammers are posing as a legitimate binary options exchange establish themselves overseas and use a simple and understandable concept to lure investors into what is an unregistered scam. Once they are discovered, US regulators have difficulty catching them abroad before they quickly close up shop and open up in another day.
The recent move by regulators to use humor and human emotion to punctuate what is usually a stale regulatory message may be new, but taking a different approach to regulation has been a concept that started after the Dodd-Frank legislation ultimately led to the whistleblower program, which cost-effectively encourages industry participants to investigate and build cases for regulators. The US government keeps nearly 80% of the fines generated from such programs while the whistleblower earns 20%.
“Education has to work has to work with enforcement supervision to be the most effective,” Rutherford said. “The stick alone isn’t the most effective and often creates more victims and perpetrators that regulators must then peruse.”
