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Facebook Fraud: Massive Scam Targets Social Networks - CBS MoneyWatch.com

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moneywatch.com / Saving & Spending / Devil in the Details

Facebook Fraud: Massive Scam Targets Social Networks

By Kathy Kristof | Jul 22, 2010 | 6 Comments

Federal investment regulators issued a warning this week about a sophisticated and fast-growing fraud

that trolls social networks for victims and has already cost investors hundreds of millions.

Using advertisements on Facebook to lure in initial victims, who are then convinced to inadvertently con their friends, so-called “high-yield investment program” scams have gone viral, spurring an entire online community, according to the Financial Industry Regulatory Authority.

“HYIPs use an array of websites and social media –including YouTube, Twitter and Facebook — to lure investors,” said John Gannon, senior vice president of investor education with FINRA. “They’re very sophisticated.”

The pitch is a simple one: Invest in safe securities that pay high yields through a supposedly “guaranteed” program that pays “interest” as often as once a week. But these programs are Ponzi schemes that do nothing more than pay old investors with the money brought in from new investors.

The trick that makes them successful? They’re using Facebook and Twitter to woo youthful and unsophisticated victims, who are then told that they can get “referral fees” for recommending the investments to their friends.

Since the Ponzi scheme appears to pay high rates — at least for a while — victims think they’re doing their friends a favor and become the scam’s most avid proponents and salesmen. The victim/salespeople are further convinced that they’re touting something legitimate because the con artists are supporting dozens of supposed “rating sites” that pretend to point investors to the “best opportunities.” There are even YouTube videos promoting the “investment programs.”

That combination has made the scam “viral” — growing at an exponential pace. The number of high-yield investment programs investigated by the FBI jumped 105% in a year. Yet the con is so new that regulators have only nabbed two operators — the people behind Pathway to Prosperityand the so-called Genius Fund, which cost investors an estimated $400 million.

“There is this whole world online,” said Gannon.  ”I never seen anything like this.”

There’s even an eBook called “Riding the Ponzi,” that acknowledges that the HYIP programs are Ponzi schemes, but contends that people can profit by “timing” the con — getting in early and jumping out before the scheme collapses.

All of the high-yield investment programs are scams, Gannon said. “It is not often that you can say that, but this time every one of them is a con.”

Avoid these schemes at all costs, regulators said. If you’ve already been taken, at least don’t send more money and certainly do not refer your friends.

But you’re sure that you’ve stumbled on the one legitimate high-yield investment program? Here are the warning signs that it’s a scam:

  • High, short-term yields: The return is usually stated as a “daily rate,”  and the schemes may offer “short-term” (daily or weekly) and “long-term” (60-day) payout options.
  • Off-shore operations: Many HYIP sites are headquartered offshore. Pathway to Prosperity, for example, was run out of the Philippines. Genius was headquartered in Cyprus.
  • Payment with e-Currency: Almost all the sites require you to open an “e-currency” account to transmit money. These e-currency sites are unregulated help the con artists obscure the money-trail that would otherwise lead back to them.
  • Incentives to recruit: Most cons offer “referral bonuses” that can let victim/salespeople earn up to 25% of the amount their friends invest. New investors are always needed to keep Ponzi schemes afloat.

If you think you’ve been scammed, report it to the FINRA Investor Complaint Center online or call them at 1-866-963-4672.

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  •  
    1

    Rodo1

    07/24/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    Bernie Madoff Lives! Thanks for the heads up!

  •  
    2

    SuzyScorpion

    07/25/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    Just a note regarding Facebook users: It's really important what you put or not put on Facebook. Whatever you do decide to place on FB, can and will stay with you forever. It will actually stay on the internet forever and ever. It's ok to put certain pics, but depending on the job you have, it could harm your career...

  •  
    3

    salgo

    07/25/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    ?There is this whole world online,? said Gannon. ?I never seen anything like this.? John Gannon, senior vice president of investor education with FINRA.

    Well, at least net-izens can rest assured that there are sophisticated members of organizations who will patrol the underbelly of this heinously fraudulent activity and put a stop to the crimes.

    'Y'all quit it. It ain't right, ya here?'

  •  
    4

    Kathy Kristof

    07/26/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    Sorry Salgo. I may not have been clear. What Gannon was
    referring to is that the high-yield scammers have created their
    own little world, with con artists supporting other con artists.
    The high yield scam has a thorough infrastructure. That's
    unusual for a con.

  •  
    5

    trusake

    07/29/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    anybody who falls for a scam using Facebook DESERVES to have their money taken away

  •  
    6

    mrstbrown

    08/01/10 | Report as spam

    RE: Facebook Fraud: Massive Scam Targets Social Networks

    Oh yes, Ponzi scams. Takes me back about 5 years ago to
    Charis Johnson and 12dailypro. It was an "investment
    opportunity" that was a Ponzi scam.

    I lost $300, but consider myself "lucky."

    Many people lost $1,000 to as much as $6,000, because with
    this "investing" scam, you were allowed to put in that much at
    one time.

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Kathy Kristof

Kathy Kristof is a syndicated personal finance columnist, speaker and author of three books, including the recently updated Investing 101 (Bloomberg, 2008).

Kathy Kristof

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