Investment chief warns of Facebook share scams

Con artists are using the wild popularity of Facebook and rumours of an IPO to lure average investors into fraudulent share deals, according to US officials.

While pre-IPO offerings in Facebook and other social media sites may be real, investors must be aware that the people touting them may be frauds, the US Financial Industry Regulatory Authority said.

“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,” said Gerri Walsh, FINRA’s vice-president for investor education.

A web search reveals YouTube videos telling investors how they can get in on the ground floor of exciting investment opportunities in social media companies, as well as blogs that are devoted to thinly traded, unregistered securities.

The touts aim to connect investment ideas to the buzz surrounding the concept of social media to lure unsuspecting investors in, said Walsh, whose agency is looking into potentially fraudulent schemes attached to social media.

Old tricks

The practice is nothing new, but the popularity of Facebook means more investors might fall for a scam that has been well tested over the years.

Last September, the US Securities and Exchange commission settled a civil action against securities broker Randy Cho, who had conned investors out of nearly $10 million in pre-IPO scams involving well-known companies between 2001 and 2009.

Self-employed Cho was telling investors he worked for Goldman Sachs and had access to shares in companies like Google, Facebook, and Rosetta Stone, and that he would invest their collective funds in these companies ahead of their widely anticipated IPOs.

“With any start-up company, early-stage investors that are putting their capital and their belief and trust into the company are exposing themselves to a great deal of loss,” said Walsh.

“The workers who often get stock options should the company ever go public, are putting in their sweat equity, so why would a stranger approach you, give you an opportunity to get in on this ground-floor investment. You need to ask: ‘Why me?'”