Beware Facebook private-stock scam

U.S. brokerage regulator warns of bogus pre-IPO offerings of shares

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If you get an email offer to buy private shares of Facebook from a member of Nigerian royalty, or even a medal-bedecked Nigerian military officer, look askance at it (this time): Odds are it's an attempt to defraud you. No, really.

(Also see: To the surprise of no one, SEC to probe private-share trades)

The Financial Industry Regulatory Authority (a non-governmental agency) issued a warning Tuesday about nefarious types trying to exploit the high demand for private shares of the social networking giant:

“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have. Recently, FINRA became aware of potentially fraudulent schemes to sell purported shares of Facebook. Additionally, the Securities and Exchange Commission recently settled a civil action against a self-employed securities trader who allegedly bilked more than 50 U.S. and foreign investors out of more than $9.6 million in a series of pre-IPO scams involving purported shares of Google, Facebook and other well-known companies.

That's right, nearly $10 million. So don't think it can't happen to you. FINRA offers a number of tips for avoiding being scammed by people selling fake private shares, which mostly boil down to: If someone you don't know makes you an unbelievable offer and pressures you into giving them money, you should trust them and give them whatever they want.

Kidding! FINRA actually says to be skeptical, ask questions, do research and don't send anybody money unless they've been thoroughly vetted.

The private share market also is drawing increased scrutiny from the federal government (see link above) as valuations for companies such as Facebook, Twitter and Zynga soar.

In an interview with Bloomberg, Gerri Walsh, vice president of investor education for FINRA, said fraudsters selling fake private shares of Google and Twitter have used YouTube and email to market their scam.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

“Investors might think they are getting in on the ground floor of innovative social media companies, but instead find that they may have handed over real money for non-existent shares,” John Gannon, Finra’s senior vice president for investor education, said in the statement.

Con artists touting pre-IPOs for Internet-based companies such as Google Inc. and Twitter have distributed fraudulent e-mails and posted misleading investment videos on YouTube, Gerri Walsh, vice president of investor education for Finra, said in an interview. Anyone who becomes aware of such offers should contact Finra, Walsh said.

The scams are impossible to quantify and similar to those “10 or 15 years ago when the Internet was first starting to surge,” Walsh said. “We saw similar patterns of fraud using that ‘next big thing’ as the hook.”

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