Legal Definitions - Investor Protection Guide: Internet Fraud

Investor Protection Guide: Internet Fraud refers to deceptive schemes and fraudulent activities carried out online that aim to trick individuals into making investment decisions that ultimately lead to financial loss. These scams leverage the internet's wide reach and perceived anonymity to spread false or misleading information, making it difficult for investors to distinguish legitimate opportunities from fraudulent ones.

Fraudsters often create sophisticated websites, use social media, send mass emails, or post on online forums to promote fake investment opportunities. They might fabricate "inside" information, promise unrealistic returns, or impersonate reputable financial institutions to gain an investor's trust. A common tactic is the "pump and dump" scheme, where fraudsters artificially inflate the price of a stock through false statements and then sell their own shares at the peak, leaving other investors with devalued assets.

To protect themselves, investors are advised to be highly skeptical of unsolicited investment advice found online and to thoroughly research any company or opportunity using independent, verified sources before committing funds.

• Example 1: Fake Cryptocurrency ICO

  A new website appears, promoting an Initial Coin Offering (ICO) for a cryptocurrency called "GlobalWealthCoin." The site features professional graphics, a detailed "whitepaper" full of technical jargon, and testimonials from supposedly successful early investors. It promises guaranteed returns of 500% within a year, claiming to have revolutionary technology and partnerships with major tech companies. Investors are urged to buy quickly before the "presale" ends. After collecting millions from eager investors, the website suddenly goes offline, the founders disappear, and the promised cryptocurrency never materializes, leaving investors with no recourse.

  How it illustrates: This is internet fraud because it uses a sophisticated online presence (website, fake whitepaper, testimonials) to create a false sense of legitimacy. It spreads misleading information (guaranteed high returns, fake partnerships) to entice investors into a non-existent investment, resulting in significant financial loss for those who participated.

• Example 2: Phishing for Brokerage Account Credentials

  An investor receives an email that appears to be from their legitimate online brokerage firm, complete with the company's logo and branding. The email states there's been "suspicious activity" on their account and instructs them to click a link immediately to "verify their identity" and secure their funds. The link leads to a meticulously crafted fake login page designed to look identical to the real brokerage site. Unbeknownst to the investor, entering their username and password on this fake page allows fraudsters to steal their credentials, gain access to their actual investment account, and transfer out their funds or sell their holdings.

  How it illustrates: This exemplifies internet fraud by using email (an internet tool) to impersonate a trusted entity. The email contains false information (suspicious activity) and creates urgency to trick the investor into divulging sensitive personal and financial information, directly leading to unauthorized access and potential theft of their investments.

• Example 3: Social Media "Stock Guru" Pump and Dump

  An individual on a popular social media platform, who has cultivated a large following by presenting themselves as a "stock market guru" with a knack for identifying undervalued companies, begins heavily promoting a little-known penny stock. They post daily updates, claiming to have "exclusive insider information" about an upcoming merger or a groundbreaking product launch for this specific company. They encourage their followers to buy shares immediately, predicting a massive price surge. As their followers buy in, the stock's price artificially inflates. Once the price reaches a peak, the "guru" quietly sells all their own shares, making a substantial profit, while the stock price subsequently plummets, leaving their followers with significant losses.

  How it illustrates: This is a form of internet fraud because it uses social media (an internet platform) to disseminate false and misleading information ("exclusive insider information," exaggerated potential) to manipulate the stock price of a company. The "guru" profits by "pumping" the stock and then "dumping" their shares on unsuspecting investors, who suffer financial harm.