Report Shows Increasing Fraud Associated With Digital Assets, Social Media
A recent North American Securities Administrators Association report reveals that state securities regulators were responsible for nearly $1 billion in monetary relief tied to state enforcement actions in 2022.
In 2022, state securities regulators investigated 8,538 cases and initiated 1,163 enforcement actions in 2022, including 136 criminal actions, 59 civil actions, and 825 administrative actions. State regulators also secured $702 million in restitution and more than $223 million in fines, as well as approximately 5,337 months in prison sentences and 9,520 months of supervised release. The 8,538 cases represent a sharp increase from the 7,029 cases reported in 2021. The data for the 2023 Enforcement Report is collected via a survey of NASAA members.
“This data shows that state securities regulators remain vigilant when it comes to protecting investors,” said Claire McHenry, NASAA president and deputy director of the Nebraska Department of Banking and Finance. “It is critically important that investors feel safe when they are investing their hard-earned money and have trust in the public markets. Our members are on the front lines of this fight, and we will continue to go after bad actors and scammers intent on doing harm to Main Street investors.”
The report demonstrates that investigations and enforcement actions taken by state securities regulators are increasingly tied to developments in technology, including digital assets and products marketed through the internet and social media. Report data reveals a significant rise in the number of investigations involving social media and internet scams in 2022, with 172 cases opened in 2022 compared to 127 cases in 2021. State securities regulators also reported filing 125 enforcement actions involving investments tied to digital assets, an increase of almost 30% from the previous year.
Also from the report, investigations confirmed that bad actors have been preying upon recent concerns about inflation and other economic issues to perpetrate fraudulent schemes tied to commodities. Investigations showed that some unlicensed investment advisers recommended clients protect themselves by selling individual holdings of specific stocks and using the proceeds to invest in precious metals.
Precious metals scammers often direct clients to open self-directed individual retirement accounts with qualified custodians. SDIRAs typically provide more flexibility than traditional IRAs by permitting owners to invest in a number of different types of alternative assets. While SDIRAs are legitimate tools for the administration of investments, bad actors often incorporate SDIRAs into their schemes to convey a false sense of legitimacy. In furtherance of their schemes, instead of describing their responsibilities, scammers often depict custodians as an independent, objective, regulated third-party working to protect clients.
The responses to the enforcement survey reflected an increasing number of cases involving SDIRAs. In 2022, state securities regulators reported 112 investigations of promoters using SDIRAs in connection with the sale of securities or rendering of investment advice – a 36% increase from 2021. They also reported 31 enforcement actions filed against parties using SDIRAs – a 24% increase from 2021.
State securities regulators work to ensure compliance within the licensed securities industry. Within the licensed securities industry, state securities regulators reported actions against 271 investment advisers and investment adviser representatives and 98 broker-dealers and agents. States continue to serve a vital gatekeeper function for U.S. capital markets by screening out bad actors before they have a chance to conduct business with unsuspecting investors. In 2022, 5,956 individuals and 291 firms withdrew their applications for licensure due to state investigations or forthcoming actions to deny, suspend or revoke their applications. For the 2022 reporting year, state securities regulators revoked 57 licenses, barred 63 individuals and 31 firms from the industry, and suspended the licenses of an additional 42 registrants. U.S. NASAA members also denied slightly more than 600 license applications—the highest number of such actions in recent years.
The report also highlights state securities regulators’ prioritization of protecting older investors. In 2022, they opened 680 investigations and filed 133 enforcement actions involving at least one older investor. These cases have historically involved traditional products that provide certainty, such as promissory notes and other investments perceived as being isolated from changes in the economy, but in 2022, the top issues in investigations involving older investors were social media and internet scams and digital assets.
Organized in 1919, the North American Securities Administrators Association is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of the securities regulators in the 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the 13 provincial and territorial securities regulators in Canada, and the securities regulator in Mexico.
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