Facebook Fraud: Massive Scam Targets Social Networks

Last Updated Sep 14, 2010 3:25 PM EDT

Federal investment regulators issued a warning this week about a sophisticated and fast-growing fraud that trolls social networks for victims and has already cost investors hundreds of millions.

Using advertisements on Facebook to lure in initial victims, who are then convinced to inadvertently con their friends, so-called "high-yield investment program" scams have gone viral, spurring an entire online community, according to the Financial Industry Regulatory Authority.

"HYIPs use an array of websites and social media --including YouTube, Twitter and Facebook -- to lure investors," said John Gannon, senior vice president of investor education with FINRA. "They're very sophisticated."

The pitch is a simple one: Invest in safe securities that pay high yields through a supposedly "guaranteed" program that pays "interest" as often as once a week. But these programs are Ponzi schemes that do nothing more than pay old investors with the money brought in from new investors.


The trick that makes them successful? They're using Facebook and Twitter to woo youthful and unsophisticated victims, who are then told that they can get "referral fees" for recommending the investments to their friends.

Since the Ponzi scheme appears to pay high rates -- at least for a while -- victims think they're doing their friends a favor and become the scam's most avid proponents and salesmen. The victim/salespeople are further convinced that they're touting something legitimate because the con artists are supporting dozens of supposed "rating sites" that pretend to point investors to the "best opportunities." There are even YouTube videos promoting the "investment programs."

That combination has made the scam "viral" -- growing at an exponential pace. The number of high-yield investment programs investigated by the FBI jumped 105% in a year. Yet the con is so new that regulators have only nabbed two operators -- the people behind Pathway to Prosperityand the so-called Genius Fund, which cost investors an estimated $400 million.

"There is this whole world online," said Gannon. "I never seen anything like this."

There's even an eBook called "Riding the Ponzi," that acknowledges that the HYIP programs are Ponzi schemes, but contends that people can profit by "timing" the con -- getting in early and jumping out before the scheme collapses.

All of the high-yield investment programs are scams, Gannon said. "It is not often that you can say that, but this time every one of them is a con."

Avoid these schemes at all costs, regulators said. If you've already been taken, at least don't send more money and certainly do not refer your friends.

But you're sure that you've stumbled on the one legitimate high-yield investment program? Here are the warning signs that it's a scam:
  • High, short-term yields: The return is usually stated as a "daily rate," and the schemes may offer "short-term" (daily or weekly) and "long-term" (60-day) payout options.
  • Off-shore operations: Many HYIP sites are headquartered offshore. Pathway to Prosperity, for example, was run out of the Philippines. Genius was headquartered in Cyprus.
  • Payment with e-Currency: Almost all the sites require you to open an "e-currency" account to transmit money. These e-currency sites are unregulated help the con artists obscure the money-trail that would otherwise lead back to them.
  • Incentives to recruit: Most cons offer "referral bonuses" that can let victim/salespeople earn up to 25% of the amount their friends invest. New investors are always needed to keep Ponzi schemes afloat.
If you think you've been scammed, report it to the FINRA Investor Complaint Center online or call them at 1-866-963-4672.

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