As Investment Fraud Losses Hit $8.6 Billion, The SEC Rethinks A Job It Was Already Supposed To Be Doing

Investors have enjoyed a remarkable bull market over the past three years, with the S&P 500 returning 87%. That’s a tough benchmark for anyone to beat. Fraudsters, though, have found a way. Now, the Securities and Exchange Commission is creating a new working group aimed at engineering a market correction in retail focused investment scams.

Americans reported losing more than $8.6 billion to online investment fraud last year, more than two and a half times the $3.3 billion reported in 2022, according to the FBI. Cryptocurrency scams accounted for $7.2 billion of those losses.

The SEC is responsible for policing investment fraud, so a new SEC working group devoted to the problem is reassuring, though it also raises an obvious question about what the agency wasn’t already doing, or was supposed to be doing. The agency announced the group on July 7 in a five-paragraph release that said it would use “data and technology” to find possible wrongdoing and build cases, but offered few details about what would actually change. With reported fraud losses soaring, it’s hard to argue with the idea. It’s also hard not to wonder why a new group is needed now.

The Retail Fraud Working Group will focus on investment scams, fraud involving securities offerings, pump-and-dump schemes, market manipulation and misconduct by brokers and investment advisers. It will also work with other regulators and educate investors about fraud, according to the press release.

That coordination could prove important when it comes to crypto. The SEC can pursue crypto scams when they involve investments covered by federal securities laws. But not every cryptocurrency falls under the agency’s authority, and some cases may require action from other federal or state regulators.

The announcement is part of SEC Chairman Paul Atkins’ effort to return the agency’s enforcement work to what he has called its core mission of protecting investors.

“The working group could generate cases in any area significantly impacting retail investors,” an SEC spokesperson says.

That broad mandate could allow the group to examine new or growing threats. It could also cover misconduct that doesn’t resemble a traditional investment scam.

For example, brokers and investment advisers can harm customers by failing to disclose important information, charging excessive fees or recommending investments that aren’t right for them, says Brenda Hamilton, founder and managing partner of Boca Raton, Florida-based Hamilton & Associates Law Group.

Still, Hamilton points out that the types of misconduct named by the SEC have long been part of the agency’s enforcement work.

“I don’t see this as stating anything new,” Hamilton says. “These are typically the types of cases the SEC has focused on.”

The announcement’s emphasis on finding cases proactively may prove more important.

Many investors assume that a stock trading publicly or an investment filing documents with the SEC means the agency has reviewed it and determined that it’s legitimate. That isn’t the case.

Companies submit financial reports and other disclosures to the SEC, and the agency reviews some filings. But the SEC doesn’t approve investments, verify every claim a company makes or guarantee that an investment is safe. Some private investments receive even less regulatory review.

That can leave regulators responding after investors have already lost money.

Scott Silver, managing partner of Coral Springs, Florida-based Silver Law Group, said the SEC has talked for decades about identifying wrongdoing earlier but has often struggled to do so.

“We don’t need enforcement in hindsight,” Silver agrees. “The money’s gone.”

Silver believes the working group could help the SEC spot warning signs sooner, shorten investigations and stop fraud before more investors are harmed. Modern technology has also made it easier to follow the money, identify repeat offenders and find suspicious investment promotions online.

Meanwhile, investors have gained access to more complex investments, while fraudsters have found new ways to reach them.

Some scams exploit trust within religious groups, professional networks or other close-knit communities. Others use social media ads, investment groups or online promotions to build interest in stocks and private investments.

Hamilton says the working group could also examine misleading stock promotions and short-sale reports, though the SEC didn’t identify social media as a specific focus.

For now, both lawyers say important questions remain. The SEC didn’t announce new enforcement powers, identify new resources for the effort or explain how it will measure the group’s success.

“It’s nice to see a recognition that more attention needs to be given to this issue,” Silver says. “But the devil’s in the details.”

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