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CFTC Issues Alert on Coronavirus Fraud

Today the U.S. Commodity Futures Trading Commission (CFTC) issued a Customer Advisory asking the traders to be on alert for frauds seeking to profit from recent market volatility related to COVID-19 (Coronavirus).

The COVID-19 Pandemic has caused uncertainty in the financial markets of the United States, creating opportunities for those looking to profit off of the crisis. The CFTC warns that “Fraudsters commonly use major news events, such as the spread of COVID-19, to add credibility to their cons or manipulate emotions.” The statement gives tips on how to recognize common fraud tactics and recommends preventative steps. 

“There is no such thing as a risk-free strategy, and no person or program can guarantee future results. Similarly, all risks, fees, and expenses should be disclosed upfront. And, if you are going to give money or assets to a person or firm to trade futures, options, forex, or leveraged commodity contracts for you, be sure they are registered with the CFTC,” the advisory states.

The CFTC warns that the “recent market losses due to the impact of COVID-19 may motivate some traders to recoup losses, while others may seek safety.” This motivation is what fraudsters will use to fuel their schemes. “If it looks too good to be true, it probably is,” is sage advice; however, illegal plots often succeed because they do look good. It is especially essential, warns the CFTC, for “experienced traders” to not let their “biases get in the way,” as it can prevent them from recognizing “what’s too good.” Also, overconfidence could cause some traders to skip crucial due diligence. 

Traders should look out for deals that “include claims of special insider knowledge or insights, promises of unusually large returns, guarantees, surefire trading signals, or low costs to open accounts.” 

Common mistakes that can lead traders to fall for fraudulent schemes include: 

∙ Confirmation bias. This bias is the tendency to give more credence to information we agree with and disregard warnings or information that disagree with our view. For example, if you believe a particular product is a safe investment, you are more likely to believe pitches that support that idea and downplay discussions about the product’s risks. 

∙ Hot hand bias. This bias is the belief that recent past success will lead to future successes, such as a gambler who throws several winning dice rolls. It leads us to disregard probabilities and randomness in the markets. Bogus foreign-exchange or binary-option signal schemes, or overpriced training programs often play off this bias. 

∙ Sunk cost bias. This bias is the willingness to put in more money, rather than cut losses because we believe things will turn around or because we’ve invested much already. Recently, the CFTC has received hundreds of fraud complaints involving online digital-asset or forex “brokers” who promise to deliver huge returns in a matter of days. After depositing a few hundred dollars of cryptocurrency, the traders are fed a number of fake statements showing huge returns. When the traders try to cash out, they’re told they must first pay a fee to get their earnings. They pay the fee, then they are told they need to pay a tax, then more fees, and so forth. Never send more money to get what is yours. 

Common fraud tactics to avoid are: 

∙ Oversized returns. This tactic is the “wow factor.” The promise of big money is often paired with guarantees or promises of little or no risk. 

∙ Urgency. Fraudsters commonly push traders to act now before market conditions change. Fear of missing out is a strong motivator, which is why this tactic is used so often. The pressure to act quickly should signal you to tap the brakes. Verify what you’re told. Get it in writing. And, get opinions from those you trust. 

∙ Credibility building. Would you give your money to just anyone? No. That’s why fraudsters generally use vague, unverifiable credentials such as “hedge fund genius,” “trading legend,” or “advisor to the biggest firms on Wall Street.” Check to see if the individual is registered with the CFTC or other regulators at cftc.gov/check. 

∙ Testimonials. Web platforms prominently display customer reviews. Social media pages show screenshots of happy customer statements showing hefty returns. These are also intended to gain your confidence by confirming other “real” people are doing this and succeeding, so it must be okay. 

∙ Reciprocity. Scams commonly offer a free gift in exchange for an email address. It could be a free demo, a free course or book, a few tokens, or other promises. However, once the fraudsters have the email address, they go to work. The offers and asks to get bigger and more frequent—until victims are bled dry. 

The CFTC also advises traders to check first to see if the person or company selling you advice or asking for your money is registered with the CFTC. While registration is no guarantee against fraud, but it does mean that registrants have passed rigorous background checks and proficiency tests, and firms meet specific financial and customer protection requirements. 

The first step to filing a CFTC whistleblower complaint regarding commodities fraud with the CFTC’s Whistleblower Office is to fill out a TCR (“tip, complaint, and referral”) form.  There are specific steps that individuals must follow when submitting this form. Whistleblowers should consider obtaining legal advice prior to filing, to ensure that they do not lose rights.  

Whistleblowers who would like to remain anonymous must hire an attorney to file the TCR form on their behalf. Because rewards can only be paid based on “original” information, the whistleblower who first alerts the Commission to a potential violation stands the strongest chance of obtaining the most substantial reward.

According to the CFTC, it has awarded approximately $100 million to whistleblowers since 2014. The Commission actions associated with those awards have resulted in sanctions orders totaling more than $800 million.

More information:

​Edited by Ben Kostyack

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

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About this Author

Mary Jane Wilmoth KKC  managing partner  whistleblower protection, environmental and nuclear industry whistleblowers, Qui Tam/False Claims whistleblowers.
Managing Partner

Mary Jane Wilmoth is the firm’s managing partner, and works closely with the partners at KKC, specializing in environmental and nuclear whistleblower protection, Qui Tam/False Claims litigation, and labor and employment law. She joined the firm in 1992, and works on cases and hearings that involve complex nuclear and environmental regulations. In her efforts to assure such safeguards are upheld in the American workplace, she has helped to strengthen whistleblower rights in licensing and enforcement proceedings with the Nuclear Regulatory Commission. She has also defended whistleblowers at...

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