HS 408 - Avoid the Wall Street Scam Artists with Consumer Financial Protection Bureau's Dan Rutherford

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Welcome to the Holistic Survival show with Jason Hartman. The economic storm brewing around the world is set to spill into all aspects of our lives. Are you prepared? Where are you going to turn for the critical life skills necessary to survive and prosper? The Holistic Survival show is your family's insurance for a better life. Jason will teach you to think independently, to understand threats, and how to create the ultimate action plan. Sudden change or worst case scenario, you'll be ready. Welcome to Holistic Survival, your key resource for protecting the people, places and profits you care about in uncertain times. Ladies and gentlemen, your host, Jason Hartman.

It's my pleasure to welcome Dan Rutherford. He is the Deputy Director of the Office of Consult, Consumer Education and Outreach of the Commodities Futures Trading Commission, former Senior Content Specialist of the Consumer Financial Protection Bureau's Office of Financial Education, and former Associate Director of the Financial Industry regulatory authorities, or FINRA's Office of Investor Education. Dan, welcome. How are you?

Oh, thanks, Jason. Thanks for having me on.

It's good to have you on. You are deep into a project educating people about fraud in the world of options trading, I guess right now, right?

Well, yeah, it's a little trickier than that. Binary options, specifically, they're not exactly what most people would think about when they think about options trading. Typically when you buy an option, it gives you the right to purchase or sell a security or a futures contract a specific price at some point in the future. With binary options, they're more of a predictive option. So if I were to say, for example, purchase a $100 option to predict what the price of Bitcoin might be at noon today, I would put $50 down to purchase the option. And if my prediction was right, I would get $50 back in addition to my principal. If I'm wrong, I lose the $50 principle. And so it's really an all or nothing, yes or no sort of binary proposition generally. And these instruments can be traded legally on registered exchanges in the United States. But the problem comes in because there are a lot of offsh. There's a lot of companies that operate from other places that are basically creating phony websites and using binary options as a platform to commit fraud. And so we're seeing this a lot in the cryptocurrency space because cryptocurrencies have grabbed a lot of attention and a lot of significant returns over recent months. That that's really drawn a lot of people into this particular fraud.

So I want to make sure we nail it. So the difference between a regular option and a binary option is what? Just kind of outline that one more time, if you will.

So it's the predictive nature of the binary option. So in other words, instead of purchasing an option with a strike price that I would get the choice to exercise or not, I purchase and make a put or call decision, a yes or no proposition against a particular market event occurring at a specific point in time.

Fantastic. Okay, good. So the fraud is occurring just because people set up fake websites. I mean, is there a tell us more about what people need to be careful of, what they need to watch out for.

Sure, absolutely. Well, first of all, let me just mention that on our website, smartcheck.gov we've released a couple of brand new videos that talk to some recent victims of this fraud and walks people through how these frauds are actually set up and committed. So I would encourage everyone to visit the site and look for those videos. But generally what happens, and this is really, it's not just a US problem, this is really a global issue. But these frauds have been going on for a number of years. But we're seeing more attention drawn to them a little bit because of the cryptocurrencies, but just because they've multiplied recently. But again, these entities that create these websites basically create phony trading platforms. They lurk on social media and whenever there's a group discussion around something like cryptocurrencies, they tend to infiltrate those groups not only with their own fake profiles, but also with a collection of fake profiles that provide testimonials. So all this is done is to create a veil of fraud that they use to lure in unsuspecting investors who might, you know, just be looking for something new or interesting to invest in. And what we've seen in some of these frauds and what makes them unique is they have a very low barrier of entry. You know, once you get past the name binary option, it really is a fairly simple product. It's a yes, no proposition and so easy to sort of understand if you make money or not make money. When you sign up, you sign up with a credit card, you'll later be contacted by someone who calls themselves a broker. They give you a lot of personalized attention, which is really a hard upsell to a lot of other products and offerings like loss insurance. They insure you against losing money. So now it becomes a risk free investment. So all of these are red flags that there's a fraud going on. Once you feel like you've really made some significant returns and want to take away some of your profits, well, guess what? They stop returning your emails and phone calls and you're left high and dry.

Do you know what amazes me? I'm sure it amazes you too. I mean, you've probably had the same thought I have. How is it that people will make so much effort to commit a fraud, to screw people, when they could simply apply the same or maybe less effort to being a legitimate business person? I mean, it's really. These criminals make a lot of effort. It's not like it's the easy road, is it? I mean, what you mentioned, they create fake social profiles, they create fake websites with fake testimonial. I mean, do you know how hard it is to keep all that going? I can just imagine. I mean, you know, I remember watching that documentary or one of them about Bernie Madoff and keeping all those balls in the air is. Can't be easy for these people.

Well, again, you know, the reason why they do it is because it's profitable and.

But so is a real business. Right? You know, that's all I'm saying. Just.

Well, yeah, but illegit, illegitimate businesses, you know, aren't regulated. They're not taxed, they're not. You know, there's a lot of, a lot of responsibility that comes with owning and operating an actual business. And that's really one of the messages that we put out on smartcheck.gov is that, you know, you really want to be sure that you're dealing with someone who is properly regulated and properly registered. And so the tools that we point you to on smartcheck.gov allow people to check those registrations either with the National Futures association, they're on the commodities and derivatives side of the business, or with FINRA on the security side.

Yeah, yeah, got it. Okay. Okay, good. So that's what's going on in the world of options. With your experience back at the Consumer Financial Protection Bureau, there's a lot of talk about the, the cfpb, you know, the past few years. Anything you can tell listeners on general financial frauds that they should be aware of or relating especially to real estate, mortgage stuff or just anything in general, you know, what are some of the main things people have to watch out for?

Well, irregardless of the type of fraud committed, you know, what we tend to see over and over again are the same telltale signs and a lot of the same frauds just using different financial Hooks. So a lot of times we talk about the red flag to fraud. Whenever someone presents really high returns and low risk, you know that that's not an equation that makes sense. So that should be an immediate red flag. If someone suddenly starts to wants to be your best friend and then appeals to you with a business proposition, again, they're trying to build credibility. They're trying to groom you to be a victim. And so that's something else that you need to be aware of. Someone might use a very nice suit and a very impressive business card to build credibility and try to build that credibility and deceive people. But again, in this day and age where we see the biggest sort of think hole for a lot of fraud is in social media. And what I tell people is don't use social media as your investment advisor and don't find your investment advisor only on social media. If someone approaches you with an investment opportunity, regardless if it's real estate or securities or commodities or what have you, your first focus should be on that individual's credentials. Check them out, make sure they're properly registered with the state regulator, with the federal regulator, check their background and work history and disciplinary history to make sure they have a clean record, and then look at the investment. If you focus first on the person, you're less likely to be swayed or influenced by the opportunity.

Interesting, interesting stuff. Talk to us a little bit more, if you would, about the cryptocurrency world. I mean, we're right in the middle of seeing a, you know, a significant regulatory change. Well, I guess there hasn't really been any regulation regulating these things as securities, which I think is probably the correct. You know, I think the government's stance, the SEC's stance on that is probably right. What do you think? I mean, you know, the, the promoters of these various cryptocurrencies are trying to say, well, it's a product, it's not a. I don't know, I guess they both have an argument.

Well, actually, as far back as about 2014, 2015, the commodity futures Trading Commission has determined that Bitcoin and other virtual currencies are actually commodities under the Commodity Exchange Act. And we've utilized that jurisdiction, our jurisdiction over those products in a number of recent cases. So if you're interested in learning more about that, you can find those cases on our website. Just as well, you know, sort of what our position is on cryptocurrencies. But that's not to say that we don't work with our other federal regulators. In fact, it's sort of fact based in that if a convertible currency like a Bitcoin we consider a commodity. However, the SEC looks at initial coin offerings, which is, you know, the offer to sell a coin at a future profit as an investment contract. And so in those cases, ICOs would be considered a security. But again, we work hand in hand with the sec, with the Federal Trade Commission, with the CFPB, and with others to make sure that we have the entire landscape covered.

Yeah. Okay, so kind of back to a little bit more on the crypto question because everybody's just asking about it, talking about it nowadays. Any opinions on where this is going? My opinion has always been that, and this is a much broader concept than I'm you cover, but maybe you just have some thoughts about it is that these are competition. Cryptocurrencies are competition for the main product of every government on earth currency. Right. And, and I don't know, I just don't think governments are going to be very accepting of having these competing products out there. You know, the other currencies, the promoters of various cryptocurrencies say, well, they can't stop it. Well, I don't know about that, but it's like the Wild west right now. And I mean, a lot of people I'm sure, have already gotten burned. I think there's a lot more to come. Do you think bitcoin will be here in 50 years or 20 years?

Your guess is as good as mine. But I do know that the underlying technology, the blockchain that runs bitcoin and other virtual currencies, a lot of financial regulators and institutions are very excited about the technology and the possibilities of that technology. And I think irregardless of what the future holds for virtual currencies, it would be a bad idea for us to just bury our heads in the sand and not expect that there could be, you know, new evolutions of products to come because of this technology. So we always have to keep our heads up and thinking about what we can do to protect the public as we go forward.

Yeah, well, no question about that. I mean, I don't think anyone's going to disagree with that, that, you know, blockchain technology is going to has a ton of applications and it's very interesting. But again, that really has very little to do with the issue of cryptocurrencies. Right. It's just something that cryptocurrencies use. It's like saying, well, you know, every business nowadays uses the Internet. Okay. But, you know, that's just the Internet and That has nothing to do with the business.

I don't know what's going to be the, the best or the surviving cryptocurrency out there, or if any of them will survive. But, you know, it's not our place to make those determinations as the government. I think that's best left to the market.

Got it, Got it. Yeah, definitely. Understand. So what are you working on next? Now that this option, you've got this option, education on the binary options out there. What's next for you?

Well, we're going to continue to put energy behind cryptocurrency education, like you say. Congress is currently looking at potential regulation, so I'm sure there'll be a lot of education to come in terms of what the new rules and what that regulatory framework looks like. There's still a lot to cover in terms of educating people about what these things are and whether or not they are an investment or a payment vehicle or, you know, something else. And so there's a lot to come in that space for us. We're also looking at ways in which we can engage more with agricultural producers, and they're a big part of our market, and we're always looking for ways in which we can help those folks and make them aware of either potential frauds or ways that they could be using the markets more to their advantage. That's really about it. I mean, we just look ahead to where the technology takes us, where the markets take us, and respond with education and, and enforcement and sort of the regulation of the markets as best we can.

You started talking a lot about social media and how these crooks are using social media so effectively to take advantage of people. Do you think it's a more dangerous landscape now for investors or a less dangerous landscape? You know, I mean, certainly all the bad actors have tools, but so do the consumers. I mean, you know, for example, people can just go check the registration of an advisor nowadays, but. But, you know, I've always kind of wondered about that one. Actually, this is a little bit of a tangent for you, too. How do you know? I mean, are you supposed to ask them for their driver's license? You know, so, you know, show me your ID so I can tell that you really are John Doe. You know, no one really does that. They just take their name as, you know, they could just lie about their. Their name. Right. That's the thing that would concern me as well.

Yeah. Well, again, I mean, the whole fraud, the whole issue of fraud is built on seat, so you can't, you know, Unless you have a lie detector built in, it's going to be kind of hard to eliminate all fraud. But most people, yeah, if you ask for a business card and they're on the security side or they're a professional investment advisor, they'll have information that would take you to the to verify the registration. The nfa, the National Futures association, has information on all introducing brokers and intermediaries that work on the future side of the business. FINRA maintains the broker dealer side of the securities business as well as maintains the SEC's investment advisory database. So using the broker check system and the basic system on Smart Check allows you to pretty much cover the full landscape there. But yeah, I mean in terms of access to information and the availability, people have all the information at their fingertips. The problem is they really don't take advantage of it or just simply aren't aware of it. And so shows like this and getting the word out to people that this information does exist is very, very valuable. You know, some of the research that we've looked at shows that when we talk about fraud victims, we generally talk about folks above 50 because it's usually that older generation, those of us in that 50 plus range and you know, upwards into 70s, 80s and 90s who have accumulated wealth over time and have a nest egg established. We're the ones who are targeted, right?

Sure.

And so when we survey those folks, we hear that 75 to 79% of them just don't check registrations. So there's a lot of work there still to do in getting that word out. So it's very important that we share that information. Likewise, if you think someone is being taken advantage of or a victim of fraud, step in and say something. Because too often we might smell something fishy and walk the other way, but nobody ever reports it. And what that does is just allow the fraud to metastasize and sort of grow and take advantage of other people. And so if you see something, say something, especially when it comes to fraud.

Right, yeah, good, good points, good points. Give out your website one more time and let people know where they can find more.

Sure. The website is smartcheck.gov you can find those videos there as well as additional resources, places to provide your tips and learn more about fraud.

Dan, thank you for joining us.

Thank you.

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