Finra Tracking Social Media IPO Scams

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Finra Tracking Social Media IPO Scams

Article published on March 16, 2011
By Joe Morris

Finra is warning investors about investment scams offering access to pre-IPO shares of social media companies, including Facebook.

In an investor alert posted on the organization's website, it says fraudsters have latched onto the social media craze.

"Social media has... become the latest hook on which con artists can hang a scam," the alert reports. "In this case, fraudsters dangle the promise of wealth from the sale of 'pre-IPO' shares."

Finra cites civil and criminal charges filed last year against Randy Cho, a self-employed securities trader who was alleged to have cheated more than 50 U.S. and foreign investors out of more than $9.6 million in pre-IPO scams involving Facebook, among other companies. The Securities and Exchange Commission settled its charges with Cho, who agreed to pay $8.2 million in disgorgement, prejudgment interest and penalties. Federal prosecutors have brought criminal charges.

Finra is aware of other potentially fraudulent schemes purporting to sell shares of Facebook, it says.

The increase in scam activity is only the latest indication of soaring investor interest in offerings of social media providers.

Fidelity and T. Rowe Price were reportedly among the investors pledging capital in a recent round of fundraising by online coupon company Groupon, and T. Rowe has invested in Twitter. The Wall Street Journal has reported that unnamed mutual funds are among those in fundraising talks with social-gaming company Zynga.

Meanwhile, Next Asset Management is working on a closed-end fund that would provide retail investors with access to primary and secondary markets where Facebook, Twitter and LinkedIn have traded.