Markets In Your Community

In hurricane aftermath, be on watch for financial fraud and investment scams

The September 2017 landfalls of Hurricanes Harvey, Irma and Maria left devastation in their wake, flooding communities, displacing countless families and disrupting local businesses and economies. In the midst of disaster, Americans rose to the occasion in an inspiring display of generosity and solidarity, offering charitable donations from afar and volunteering on the scene to deliver victims to safety.

Challenges like responding to and recovering from natural disaster typically bring out the best in people and communities. Unfortunately, these same disasters also create an opening for those who would seek to manipulate and exploit victims through fraud.

Law enforcement agencies are already on the job to stop the scammers in their tracks. In Texas, for example, federal and local investigators, regulators and prosecutors formed a task force to crack down on those who may be “targeting Texans with fraudulent financial and investment schemes related to the South Texas weather crisis.”

But the best defense, as always, lies in knowing enough to not be a victim in the first place. In the aftermath of the recent hurricanes and other natural disasters, be on the lookout for financial scams.

Know the indicators of investment fraud 

The Financial Industry Regulatory Authority (FINRA) has offered helpful post-hurricane guidance to protect investors against shady investment offers intended to take advantage of natural disaster victims.

FINRA’s warning is based on previous fraud activity that followed in the wake of disasters, and cautions investors and consumers to be wary of any “unsolicited communications about investments that exploit the latest natural disaster,” such as the following: 

  • price targets or predictions of swift and exponential growth; 
  • the use of facts from respected news sources to bolster claims of a price run-up; for example, that some percentage of the billions of dollars it will take to rebuild after Harvey will contribute directly to a company’s bottom line; 
  • mention of contracts or affiliations with federal government agencies or large, well-known companies; 
  • standard corporate developments, like contracting with a supplier, presented as major events; 
  • statements about how much easier it is for low-priced stocks to skyrocket in value in comparison to higher-priced stocks; and 
  • pressure to invest immediately, such as “You must act now!”

The FINRA notice also includes several steps you can take if you receive a suspicious offer, like running the name of the broker through FINRA’s BrokerCheck site and checking out Securities and Exchange Commission (SEC) records to ensure the legitimacy of the company offering. Remember, if it sounds too good to be true, it probably is.

How fraud perpetrators operate

Likewise, the SEC has also issued an investor warning, based upon the federal regulatory agency’s experience with previous post-disaster scams. The SEC warning highlights some of the common forms fraudulent investment offers may take:

Some scams are circulated through spam e-mail, promising high returns for small, thinly-traded companies that supposedly will reap huge profits from recovery and cleanup efforts. For example, the SEC brought several enforcement actions against individuals and companies who made false and misleading statements about alleged business opportunities in light of the damage caused by Hurricane Katrina in 2005. 

Some of those cases involved pump-and-dump scams where fraudsters used fake “news” to pump up the stock price of small companies so they can sell shares they own at artificially high prices. 

We also heard about fraudsters targeting individuals receiving compensation from insurance companies. Individuals, including those receiving lump sum insurance payouts, should be extremely wary of potential investment scams related to Hurricanes Harvey or Irma.

Report complaints about suspicious activity to the SEC complaint center here:

Beware of fake charities and recovery scams

Disaster recovery also creates an opening for unscrupulous operators who launch fake charities and “rebuilding” efforts to score contributions from well-meaning individuals who want to help by donating. Unfortunately, those donations never find their way to the victims and communities they’re intended to help.

The Federal Bureau of Investigation has published a helpful resource page for those who would like to contribute. If you’re planning to give to the post-disaster relief effort, be sure to take the following steps:

  • Donate to charities you know and trust. 
  • Designate the disaster to ensure your funds go toward disaster relief. 
  • Never click on links or open attachments in unsolicited e-mail. 
  • Don’t assume that charity messages posted on social media are legitimate. Research the organization. 
  • Verify the legitimacy of any e-mail solicitation by contacting the organization directly through a trusted contact number. 
  • Beware of organizations with copycat names similar to but not exactly the same as those of reputable charities. 
  • Avoid cash donations if possible. Pay by credit card or write a check directly to the charity. Do not make checks payable to individuals. 
  • Legitimate charities do not normally solicit donations via money transfer services. Most legitimate charity websites end in .org rather than .com. 
  • Make contributions directly, rather than relying on others to make a contribution on your behalf.

The FBI page also includes information on whom to contact if you have information about suspected charitable fraud.

It’s an unfortunate reality that some bad actors will take advantage of disasters for their own gain, so it’s best to be on guard and be prepared. The good news is that financial industry leaders, regulatory agencies and law enforcement are increasingly aware of the tactics scammers use and are working to protect the vulnerable from becoming victims of fraud.

Remember, forewarned is forearmed: take the time to share this article and these resources with friends and family on social media, to spread the word and ensure that others know to be vigilant about potential fraud risks.

Related reading: How banks sped up the recovery after the 2012 Hurricane Sandy landfall