Quick Look at All the Popular Cryptocurrency Scams and How to Fight Back
As I rewrite this post (April 2021), most of the major cryptocurrencies are at record highs. But the volatility in these investments also remains at record levels. That means you could see a huge gain in just 24 hours or see your retirement savings wiped out within a day.
We have nothing against folks investing in cryptocurrencies. While none of us have a crystal ball, there are certainly thousands of newly minted millionaires courtesy of crypto investments. And that is what makes these investments so attractive to investors and scam artists alike.
Cryptocurrencies, often called virtual currencies or tokens, are not issued and backed by a government or central bank. Instead they are digital assets. Their validity stems from decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. Theoretically they are immune from government manipulation which has made them even more attractive since many governments are seemingly printing trillions in new money without any sort of backing.
According to InvestmentNews, financial advisers report that 81% of their clients expressed interest in crypto within the last 12 months. To date, most brokerage firms have steered clear of recommending these investments.
With so much client interest, the pressure is on stockbrokers and investment advisers to fill the need. If they don’t, their clients could go elsewhere.
Suitability and Cryptocurrency Investments
Stockbrokers and investment advisors have a duty to make recommendations that are “suitable” for their clients. Not surprisingly, these so-called suitability and know your customer rules dictate what your advisor can recommend to you.
Are you a young millionaire with a high tolerance for risk and no immediate need to access your money? Maybe crypto is right for you. But what about the 67 year old retiree with no financial experience and who needs her savings to maintain her through retirement?
Until now, stockbrokers and investment advisors couldn’t do much in the crypto space. Many still are forbidden to do so by the firms they work for. Has that stopped some brokers from recommending crypto to their customers? The answer is no.
Selling Away
If a broker is permitted to sell certain crypto investments or cryptocurrency ETFs, they are bound by the suitability rules described above. But what if the broker isn’t authorized to offer these investments but does so anyway? This is called “selling away.”
Selling away takes place when a broker sells an investment not authorized by his or her firm. Rather than lose a customer (and a commission), bad brokers will recommend investments not authorized by their company. If the broker is pushing an initial coin offering (ICO), crypto related stock or virtual currency investment without the knowledge and approval of their employer, they are guilty of selling away.
As long as the cryptocurrency market continues its meteoric rise, they probably don’t get caught. But if the investment tanks and the broker is guilty of selling away, both he and his employer may be responsible for your losses. It doesn’t matter that the brokerage firm had no knowledge of your broker’s activities. They have a duty to supervise their agents.
Brokers and brokerage firms also have an obligation to perform due diligence on the investments they are recommending. We are shocked how many brokers can’t even explain blockchain. If they don’t understand what they are selling, they shouldn’t sell it.
Ditto for the brokers who base their recommendations on the size of the commissions paid instead of the underlying merits of the investments. ICO scams and crypto fraud is an everyday occurrence. If stockbrokers and investment advisors want to put clients into virtual currency investments, they have to be able to weed out the scams first.
Before we move on, an important caveat. Neither a stockbroker nor the brokerage firm is responsible if the crypto investment is your idea. We can’t protect people from themselves but the law will protect them if they relied on the recommendation of a broker and the investment wasn’t suitable for their risk tolerance or financial situation or if the broker failed to perform adequate due diligence on the investment.
Cryptocurrency Scams
Assume that you invested in a cryptocurrency investment that turned out to be a scam. Or let’s say you have information about one of these scams. Now what?
First, let’s look at popular forms of cryptocurrency fraud.
- Financial Crimes: Crypto’s instant transactions and lack of a traditional paper trail make them the preferred method of tax evasion, criminal activity and money laundering. If you have inside information about these schemes you may be eligible for a large cash whistleblower reward. See our cornerstone content on IRS whistleblowing, AML whistleblower rewards and rewards for information about bribery of foreign government officials.
- Scam Initial Coin Offerings (ICO Fraud): Unfortunately ICO fraud is rampant. Many of these offerings are phony. Even the address of the offeror’s offices is fake. And because these scam artists want to get paid in crypto themselves, tracking down your lost funds is difficult. If you have inside information about one ICO fraud you may be entitled to a CFTC or SEC whistleblower reward. If you purchased your ICO through a stockbroker, we may be able to recover your investment.
- Pump and Dump Schemes: Fraudsters have long hyped stocks simply to drive up their price. While they are pumping up the price of the stock, they are also dumping their shares and making massive profits. Cryptos are no different. There isn’t much we can do unless you purchased from a registered stockbroker or investment advisor. If you have inside information on crypto pump and dumps, you may be eligible for an SEC whistleblower reward (see link above).
- Theft: Crypto also provides criminals new opportunities for theft. We have seen cases where fraudsters have hacked into investors’ digital wallets or engaged in SIM card hacking to access investor’s crypto investments. The schemes and tricks used by cryptocurrency fraudsters are endless.
- Stockbroker Fraud: Earlier we talked about selling away and stockbrokers that fail to make suitable recommendations.
- Scam Promotors: In 2019 we wrote about boxing legend Floyd Mayweather and DJ Khaled. Both were busted for promoting a phony crypto Visa card. Once again, if you have inside information about ICO or cryptocurrency fraud, you may be entitled to a cash whistleblower reward.
Are You the Victim of a Cryptocurrency Fraud?
Do You Have Inside Information about a Cryptocurrency Scams?
If you lost $100,000 or more in an ICO, a cryptocurrency fraud or unsuitable cryptocurrency investment and the investment involved a licensed financial professional, we may be able to help. For more information about cryptocurrency frauds, visit our cryptocurrency and ICO fraud page. Similarly, if you have inside (original source) information about a cryptocurrency fraud, visit our SEC, IRS or AML whistleblower rewards pages at the links above.
Want to know if you have a case? Contact us online, by email at brian@mahanylaw.com or by phone at (202) 800-9791. All inquiries are kept in strict confidence.
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