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Artificial Intelligence and Investment Fraud

Woman learns how to potentially avoid AI investment fraud

Tips to Help Protect Yourself and Your Investments

With new technology comes exciting new efficiencies, and artificial intelligence (AI) is no exception. AI offers a wide range of opportunities to streamline a wide range of functions, including our approach to investing. Unfortunately, along with the multiple benefits of AI come multiple fraud risks, especially when it comes to investing.

Earlier this year, the Securities and Exchange Commission (SEC), Office of Investor Education and Advocacy (OIEA), North American Securities Administrators Association (NASAA) and Financial Industry Regulatory Authority (FINRA) issued a joint alert to notify investors of an increased risk of fraudsters using the growing popularity and complexity of AI to lure victims into scams.

There are two main ways fraudsters are using AI to target investors.

#1 – Fraudulent or subpar AI investment opportunities

We’ve all heard of investors who made big money investing in early-stage technology companies. After all, with big risk comes the potential for big payoffs. While it’s true technological advancements can create exciting opportunities, it’s important to carefully evaluate any potential investments before committing.

A recent round of investment fraud involves fraudsters using AI-related terms to make claims that investing in their companies will lead to big financial gains. Representatives often apply high-pressure sales tactics, urging you to act immediately so that you don’t miss out. They typically promise “guaranteed” returns with no risk.

There are two fraudulent strategies to be on the lookout for:

  • Pump-and-dump schemes – This strategy involves making false claims about a public company’s AI-related products and services in order to “pump up” the stock price. False information is often spread through fake news coverage, online ads and social media posts. The hype around these companies prompts investors to buy the stock, which drives up the share price. The fraudsters behind the false information then “dump” their own shares, selling at a profit before investors realize the scam. At some point in the future, the stock price drops significantly and investors still holding shares lose a good portion of their money.
  • Microcap stocks – Fraudsters are also using microcap stocks, low-priced stocks of small companies, to execute their investment schemes. Due to their small size, it’s typically difficult to access public information about these companies’ products, services, finances, management teams, etc. Fraudsters use this lack of information to their advantage by spreading false information about these companies in order to entice investors.

#2 – AI-generated misinformation

In addition to pressuring investors to buy stock in a certain company, scammers are using AI technology to spread false information. This includes AI-cloned voices, altered images and fake videos. Some fraudsters have gone so far as to use AI to impersonate potential victims’ family members and friends in order to scam them out of money.

For example, fraudsters were caught using AI-generated audio to impersonate an investor’s grandchild, calling with a financial emergency that required the victim immediately transfer funds to help out his grandchild.

Other ways of using AI technology to scam investors include producing fake videos impersonating a company’s CEO to announce false news about the company, creating websites and marketing materials to push fake investments, or even impersonating government officials and SEC staff.

How to protect yourself

Fortunately, there are steps you can take to try to protect yourself from falling victim to AI investment scams:

  • Don’t rely solely on what you see/hear. Remember that if an investment seems too good to be true, it probably is. Anyone who guarantees investment returns with little to no risk should have their claims carefully evaluated and independently verified.
  • Always work with registered investment professionals. Before investing, make sure the person you’re working with is a legitimate investment professional. You can confirm an individual’s registration status and check for any past disciplinary action on the SEC website.
  • Be skeptical of calls or emails from family and friends urgently asking for money. Any time you receive an urgent request for money — even from your closest family and friends — it’s wise to confirm its legitimacy. Scammers can be good at stirring up your emotions to get you to part with your money. Regardless of how urgent the request is, be sure to independently verify your loved one’s request before transferring money or securities.

For more tips on how to avoid investment fraud, schedule a call with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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