You know that the factors affecting an investment’s valuation go behind standard data and metrics. Often, an investment’s value can hinge largely on highly subjective factors, like public perception. The “reputation” of an asset or security can either signal an attractive investment opportunity or drive away investors.
You’ve probably heard of pump and dump schemes; a form of stock manipulation wherein essential information about an asset may be misrepresented or misreported in order to artificially drive-up its value before the scammer dumps their shares. In these types of schemes, fraudsters create a buy frenzy by promoting a stock as a desirable investment.
Well there’s also an inverse to this type of investment fraud and it’s called a short and distort scam.
In short and distort scams, fraudsters will artificially drive down an asset’s investment value by spreading false or unfounded negative press about it.
You probably don’t like to think that you are one who is too easily swayed by what others say or do, and that may be true. But the way information shapes our perceptions can be subtle. Sometimes, it’s not as clear as someone telling you what decision you should make. Fraudsters know this, and they know how to conceal and deceive too.
Scammers can use many tricks to dupe investors during the decision-making process. In word-of-mouth scams like pump and dump or short and distort schemes, scammers rely on information appearing to come from a credible source. You wouldn’t hinge your investment decision on the advice of a stranger, but what if the suggestion to buy or sell comes from someone you trust?
How to Spot a Short and Distort Scam
The Securities and Exchange Commission (SEC) actually reports short and distort scams as a persistent, growing problem. The issue is that these types of scams subsist on an assumed position of authority. Essentially, theses scams are perpetrated one of two ways:
- The fraudster may hide behind false identity or present themselves as being in association with a legitimate source.
- The source of the information has legitimate authority or esteem but may be corrupted and acting to suit their own interests.
Whatever the case, it can be extremely difficult to spot these types of scams. These types of scams exploit our vulnerabilities; our doubts and trust in others.
But you can avoid falling victim to them. There are ways to spot word-of-mouth scams and investment practices you can adopt to mitigate risks.
Find out where your information is coming from
As we mentioned above, there are essentially two potential sources for short and distort scams. Whatever (or whomever) the apparent source, it’s important that you actually find out where the information you are receiving originated and to what extent that information is valid.
The internet age has made it remarkably easy for people to hide behind false names and identities. Scammers especially have been able to capitalize on access to these new technologies.
Be wary of email and/or social media campaigns
If you start seeing negative press about a stock or security online, make sure you investigate the poster.
- What is their post history? If there is limited to no prior history of posts, it’s a good sign the account was set up recently.
- Examine the content. Look for typos or inconsistencies in the text. A legitimate source of information would have a consistent tone and style.
Determine motives
Even if you know that the source of the information you are receiving is legitimate, you need to make sure the information itself is valid. To do this, you need to understand the motives behind that individual or entity disseminating that information.
Ask yourself what they may have to gain by sharing negative press about a stock or security. Is that person/entity taking a short-sell position? If so, that’s a clear indication of short and distort manipulation.
- Celebrity Endorsements
- We’ve all seen ads for products featuring celebrity endorsements and it’s no different with investment-based products. While celebrity endorsements are meant to lend credibility to a product, it by no means ensures a product’s legitimacy or usefulness. This is especially true with investment products. Find out more here.
- Aggressive Solicitation Practices
- Aggressive or unwarranted solicitation of services or information should be an immediate red-flag. If you have been receiving repeated calls, emails or requests for correspondence from an individual claiming to be a broker-dealer associated with your account, you need to verify they’re identity.
Do your investment due diligence
Regardless of whether a word-of-mouth scam is being perpetrated, you should always do your homework on a stock or asset before making any financial decision. Basing your decision solely off the advice of others – or worse, unsubstantiated rumors – is foolish and dangerous.
You should have a fundamental understanding of the performance and status of your investment portfolio. That way, you are able to verify the validity of negative claims against a stock or security.
Additional Resources
If you’re looking for in-depth resources for investment advice, news and tips, check out our blog! You can also visit the SEC website for their extensive archive of investor education materials.
Contact our team if you believe that you may have suffered an investment loss due to a short and distort manipulation or other word-of-mouth scam. We can help sort through your claim and discuss your options, including whether you can sue your stockbroker and if you are entitled to investment-loss recovery.
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