Worthless Stock: How to Avoid Doubling Your Losses
Con artists across the globe have stepped up their efforts to rip off investors, especially non-U.S.
residents who have lost money in the U.S. securities markets. While it’s natural to want to recoup one’s
losses as quickly and as fully as possible, the SEC warns investors to be extremely skeptical of offers to
exchange worthless or poorly performing stocks for blue chips or “hot” performers.
Worthless stock is typically just that — worthless. And anyone who promises a quick way to recover
from a bad investment is probably just lying to you. We encourage you to thoroughly investigate
investment opportunity, as well as the person promoting it, before you part with your money. This is
especially critical if you are a non-U.S. investor seeking to invest in U.S. stocks — or if you learn
about the opportunity over the telephone from a broker you don’t know. The “broker” may well be a con
artist, and the deal may be a dud. Remember, if an offer sounds too good to be true, it probably isn’t
This alert tells you how to spot potential “stock swap” scams, how to evaluate the offers you hear
about, and where to turn for help.
What to Watch Out For
Although fraudsters use a wide variety of techniques to carry out their “worthless stock swap” scams, most
of these frauds boil down to a predictable formula: a persuasive pitch, which nearly always contains false
assurances of legitimacy, followed by demands for money. Here are some “red flags” to avoid:
Aggressive Cold Calls
from "Boiler-Rooms" — Con artists posing as U.S. or United Kingdom brokers will first identify
investors who have lost money investing in “microcap” stocks, the low-priced and thinly traded stocks
issued by the smallest of U.S. companies. Operating from remote
boiler-rooms, they then mount an aggressive cold calling or emailing
campaign, focusing their pitch on loss recovery. They might offer to swap a poorly performing stock
for an established, blue chip stock — or they will claim that their firm or an anonymous “client” wants
to purchase the shares directly.
Impressive Websites Serving as Fronts for Virtual Offices — To make their schemes appear convincing,
fraudsters will invite you to visit “their” website — which will have pages of detailed information and
perhaps a photo or biography of the broker. But all too often the site will be nothing more than a
fraudulent copy of a legitimate firm’s website — with changes made only to the name and contact
information. The con artists will adopt fake yet familiar-sounding names and operate out of virtual
offices, using phony addresses, remote mail drops, and redirected phone and facsimile numbers to carry
out their scams.
Self-Provided References — Knowing that regulators encourage investors to investigate before they
invest, fraudsters often pretend to do the same. They will falsely assure you that the investment is
properly registered with the appropriate agency and purport to give you the agency’s telephone number
so that you can verify that “fact.” Sometimes they will give you the name of a real agency — other
times they will fabricate one. But even if the agency does exist, the contact information invariably
will be false. Instead of speaking with a government official, you’ll reach the fraudsters or their
colleagues — who will give the company, the promoter, or the transaction high marks.
Claims of Government “Approval” — Another ruse fraudsters use to appear credible involves
the misuse of federal agency seals, including the seals of the SEC and the Federal Trade Commission.
They will copy the official seal from the regulator’s website and use it to create fake letterhead for
a fictitious letter of approval. But you should know that the SEC and FTC — like other state and
federal regulators in the U.S. and around the world — do not “approve” or “endorse” any particular
stock transactions or “loss recovery” programs.
Advance Payment Requests — Regardless of how the fraudsters pitch their offers to “help”,
there’s always a catch. Before they will complete the deal, they first will ask for an upfront
“security deposit” or “margin payment” — or claim that you must post an “insurance” or “performance
bond.” The minute you pay the advance fee, the fraudsters nearly always disappear — leaving you with
new losses. If you seem willing to make further payments, the con artists may instead keep asking for
more — falsely claiming that the market price of the security has changed or that the payments will
cover additional fees, taxes, bonds for the courier service, or other similar expenses. Only when you
finally run out of patience or money to chase your losses do the fraudsters disappear for good.
How to Protect Yourself
Regulators often refer to worthless stock scams as “recovery room operations,” “advance fee schemes,”
or “reload scams” because the perpetrators prey on individuals who lost money once and are willing to
invest even more in the hope of recovering their losses. Here are several ways to arm yourself against
these thieving opportunists:
Look Past Fancy Websites and Letterheads – Anyone who knows how to “cut and paste” can create
impressive, legitimate-looking websites and stationery at little to no cost. Don’t be taken in by a
glossy brochure, a glitzy website, or the presence of a regulator’s official seal on a web page or
document. The SEC does not authorize private companies to use our seal. If you see the SEC seal on a
company’s website or materials, think twice — and then think twice again.
Be Skeptical of Government “Approval” — Like most regulators around the world, the SEC does not
evaluate the merits of any securities offering, nor do we determine whether a particular security is
a “good” investment. Moreover, we never endorse specific firms, individuals, products, or services.
Deal Only with Real Regulators — Don’t be fooled by those who tell you how and where to check out
their credentials. Go straight to a real regulator for help. Here are the URLs you’ll need to find
Caution: If your contact provides any of these links electronically (in an email or on a website),
do not simply click on those links. Type the full URL into your web browser
yourself. Even though the
URL looks right, a fraudster’s link can take you to a very different destination.
Independently Determine Whether the Offering Is Registered -- In general, all securities
offered in the U.S. must be registered with the SEC or qualify for an exemption. You can see whether a
company has registered its securities with the SEC and download its disclosure documents using our
Check Out the Broker and the Firm – Always verify whether the broker and the firm are properly
licensed to do business in your state, province, or country. If the person claims to work at a U.S.
brokerage firm, use NASD’s BrokerCheck website or call NASD’s Public Disclosure Program hotline at
(800) 289-9999. If the person works elsewhere, contact the securities regulator for that country — and
also for your home country, if more than one country is involved.
Independently Verify References – Never rely solely on references given to you by a broker you’ve
never worked with before. The “international organizations” or “satisfied clients” they suggest you
contact may well be part of the scam.
Be Wary of Unusual Banking Instructions – Most reputable brokerage firms in the U.S. would not
ask you to send your money to a non-U.S. bank — or to a U.S. bank for further credit to another bank or
entity. In fact, a U.S. broker probably would not ever ask you to send payment to their bank at all.
Where to Turn for Help
If the case appears to involve a U.S. broker, please send your complaint in writing to the SEC using
our Online Complaint Center. Be sure to include as many details as possible, including the names, addresses,
telephone or fax numbers, and e-mail addresses or websites of any person or firm,
the dates of each contact, and information on any specific representations and
wire instructions provided by the broker.
Because many investment scams occur entirely outside the U.S., the SEC may not have jurisdiction to
investigate and prosecute wrongdoers — even if the fraud involves stock issued by a U.S. company. If you
run into trouble, contact the securities regulator for your home country and also the country where the
broker does business.
How to Get More Information
If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an
investment based solely on a promoter's promises over the telephone or what you see on the Internet —
especially if the investment involves a small, thinly-traded company that isn't well known. And don't even
think about investing on your own in small companies that don't file regular reports with the SEC, unless
you are willing to investigate each company thoroughly and to check the truth of every statement about the
For more information on investing wisely, please visit the Investor Information section of our website.