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US Regulators Issue Facebook Stock Scam Warning

March 16, 2011

Federal financial regulators in the US are advising people to be cautious when purchasing pre-IPO shares in companies such as Facebook, as they may be bogus.

In a statement released Tuesday, the Financial Industry Regulatory Authority (FINRA) issued a warning in regards to “scams that purport to offer investors’ access to pre-IPO shares of well-known social media companies, including Facebook.”

“Seizing upon investor demand for shares of the private stock of high-profile companies, the con artists behind these scams are swindling the public by peddling non-existent shares of these companies,” FINRA officials said in their statement. “While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have.”

The warning came after FINRA said that they had become aware of “potentially fraudulent schemes to sell purported shares of Facebook,” as well as a recent civil action, settled by the Securities and Exchange Commission (SEC), against “a self-employed securities trader who allegedly bilked more than 50 U.S. and foreign investors out of more than $9.6 million in a series of pre-IPO scams involving purported shares of Google, Facebook and other well-known companies.”

“Investors might think they are getting in on the ground floor of innovative social media companies, but instead find that they may have handed over real money for non-existent shares,” John Gannon, FINRA senior vice president for investor education, told AFP reporters on Tuesday. “Any investor who receives an unsolicited offer to invest in a pre-IPO company should walk away.”

In an interview with Bloomberg reporter Justin Doom, FINRA’s Vice President of Investor Education, Gerri Walsh, said that con artists had been distributing fraudulent emails and posted videos online that offered misleading information. Walsh compared it to the kinds of scams that were prevalent “10 or 15 years ago when the Internet was first starting to surge.”

John McCrank of Reuters reported that blogs and videos touting these alleged pre-IPO investment opportunities could easily be found by searching YouTube or other popular Internet websites. They aim “to connect investment ideas to the buzz surrounding the concept of social media to lure unsuspecting investors in,” he said, citing Walsh as the source for his information.

“Investors need to understand that it’s extremely rare and extremely unlikely that the average Main Street investor will have access to these kinds of shares in social media companies, before those companies go public, if they ever go public,” Walsh added.

According to their official website, FINRA is the largest independent regulator for securities firms in the US. They state that they are dedicated to protecting investors and the integrity of the market by enacting effective and efficient regulations and compliance-based services.

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