By Benjamin Stubbs, Spring 2014 Student Intern
How trusting are you? You probably would not lend the keys to your car or your house to someone except for limited situations. For example, you may have freely given your car keys to a valet at a restaurant or hotel, or you may have given your house keys to a neighbor or a house sitter when you went out of town. You probably would not lend the keys to your house or your car to a total stranger, however, regardless of what that stranger promised you. The risk of damage to your property would be too great, and how would you ever find the person if they stole your car or your belongings and made a run for it?
The same should be true for your investment accounts. How freely would you give someone the keys to those? This week’s fraud involves people who gave control over their investment accounts to scam artists who posed as trustworthy experts. Coming in seventh on NASAA’s list of most common investment frauds of 2013 is proxy trading accounts. These are fairly simple schemes that are based on two words—trust me. When the trust is unfounded, though, people can lose a lot of money and have no way to get it back.
What are proxy trading accounts?
There are legitimate ways to allow someone to manage your investments. They’re generally called discretionary accounts, which means that a licensed broker has authority to buy and sell securities on your behalf without your consent. Like loaning your car keys to the valet or your house keys to a house sitter you know and trust, these are not always a bad idea, because if the person is a licensed broker, you have reason to trust him or her and have a means of recourse—FINRA arbitration—if something goes wrong.
A proxy trading account is simply an investment account where one person is authorized to control the account and make trades on another person’s behalf. As NASAA explains, these accounts generally involve one person who has, or claims to have, investment expertise and offers to set up or manage another person’s investment account. The “expert” or proxy may set up the account for the investor or just request the username and password of the investor’s account. After that, the proxy has control of the account. When the proxy acts honestly, he or she manages the account for the benefit of the investor. The problem is that things are not always done honestly.
Sometimes, proxy accounts are nothing more than a scam artist collecting usernames and passwords of investment accounts. Instead of investment expertise, the scam artists have fraud expertise, and instead of trading for the benefit of the investor, they have only their own interests in mind. With only his or her own interest in mind, scam artists may take your money and run. So, if you’re interested in letting someone else manage your accounts, it is necessary to make sure you can trust that person.
What can you do to protect yourself?
The easiest and most important way to protect yourself from falling prey to a proxy account scam is to ask and check. If anyone offers to set up an investment account on your behalf, always ask they person if they are licensed and registered with state and federal agencies. As NASAA explains, investors should always “check with their state securities regulator to confirm that anyone offering to manage your accounts is properly registered and has a clean background.” Additionally, run a BrokerCheck on the person. If the person is not registered, don’t trust him or her, and end the conversation immediately.
It is important that whoever you’re dealing with is properly registered because that means you have more reason to trust that person, and if that person does something wrong there is a better chance you can get your money back. As NASAA points out, licensed professionals “commit to act ethically and honestly[,]” and if they do not, “they will answer to state or federal regulators.” Unlicensed individuals, on the other hand, have made no such commitment, and it will be much harder to make them answer to regulators.
Don’t be too trusting.
You wouldn’t give the keys to your car or house to a total stranger no matter how kind and reassuring the person seemed. Don’t give the keys to your investments away either. Though some discretionary accounts are legitimate, you need to make sure you’re dealing with a licensed professional before giving anyone the authority to manage your accounts. You have more reason to trust licensed professionals, and you have an easier means of redress if something bad happens, so make sure your account manager is licensed.
If you think you may have fallen prey to a scam artists who got control of your account, call our Clinic. And remember to check back in next week for the next lesson from the past that can help you protect your future.