How cyber fraudsters are luring young investors into stock market scams

In today's digital world, the stock market is more accessible than ever, particularly for young investors looking to build wealth. More often, we forget to see the dangerous rise in cyber fraud, where scammers lure investors with promises of quick, high returns.

Recently, a businessman from north Mumbai fell victim to a Rs 1.25 crore online stock market fraud. After being enticed by a social media ad promising high returns, he joined a WhatsApp group and was convinced to invest in various IPOs. His shares were sold without consent, and after demanding his investment back, he was asked to deposit more money - only for the fraudsters to disappear.

An alarming rise in share trading scams that target investors after being lured into quick and easy high returns. Fraudsters are leveraging social media, misleading marketing strategies, and psychological manipulation to lure these young investors into traps that can lead to significant financial losses, the experts say.

A case of cheating was registered last week but the fraudsters were yet to be identified, an official said.

Explaining the fraud, an official said that the complainant, a Kandivali resident who runs an event management company had initially come across an advertisement on a social media platform that promised high returns in the share market in July. He joined a WhatsApp group and a few days later a person encouraged the businessman to invest through his firm and sent him a link to a website.

After the victim provided his details and uploaded some documents. He was induced to invest Rs 1.25 crore in various IPOs. But the fraudsters then sold his shares without his consent, and when he asked for the return of his original investment and profit totalling Rs 2.25 crore they asked him to first deposit an additional sum.

He did that but the money was not transferred to his account and the fraudsters stopped responding to his messages. The police are now probing the matter further.

Accelerated trend towards online trading

An official explained that the COVID-19 pandemic has accelerated a trend towards online trading, with many young people turning to social media platforms to make quick money but ending up being duped by fraudsters. The promise of quick returns and the ability to trade with minimal investment have captivated millennials and Gen Z investors. The cyber fraudsters share testimonials of rapid wealth accumulation, enticing young investors to follow their lead which may lead to loss of money.

Social media is a double-edged sword in the world of investment. On one hand, it provides a platform for education and community building; on the other hand, it is a breeding ground for misinformation and scams. Fraudsters often create fake profiles or impersonate successful investors to gain credibility.

Forensic Psychologist Krupa Nishar told mid-day.com, "Stock market scams cleverly exploit psychological strategies, manipulating human behaviour to drive risky decisions. Fraudsters often use tactics like exclusivity, creating the illusion of a once-in-a-lifetime opportunity, or urgency, pushing victims to act fast before they miss out. The term 'Fear of Missing Out' is frequently leveraged, making young traders feel they're missing a golden chance to 'beat the market.' These psychological tricks take advantage of emotional investment and lack of expertise, leading to impulsive decisions."

She added, "Scammers also use tactics like social proof, making it seem like 'everyone's doing it,' or reciprocity, where small rewards are offered upfront to gain trust. They trigger fear with fake urgency - 'Invest now or lose your chance!' - pressuring impulsive decisions. These manipulations align with Social Influence Theory, which explains how individuals, especially children, follow the crowd or so-called 'experts.' Educating the next generation in critical thinking and online safety is crucial to avoid these frauds."

The ED case

In September, the Enforcement Directorate (ED) arrested three people in Bengaluru, all aged between 25 and 26 years old. The ED, in an official statement, said that in this case, related to cyber investment scams, innocent persons were cheated and defrauded of their hard-earned money by inducing them to invest in stock markets through fake and fraudulent apps.

The ED said that the investigation conducted under the Prevention of Money Laundering Act, 2002 revealed that victims of the aforementioned cyber scams are being cheated through fraudulent stock market investment options in the following manner: -

- Luring victims: The first step of a scam involves luring the victims via various social media platforms including Facebook, Instagram, WhatsApp, and Telegram by giving false promises of high returns on their investment, allotment of IPOs through special quota, etc.

- Fake groups: Once the victims seem interested, these scamsters then add these victims to WhatsApp/Telegram Groups, which also have fake members planted by these scamsters in these groups for sharing fake and fabricated success stories in these WhatsApp groups. These WhatsApp groups have names similar to well-known apps/financial institutions e.g. ICICI Securities, GFSL Securities, SMG Global Securities, Blackrock Capital, and JP Morgan to create an impression that these groups are genuine.

- Fake apps: Once the victims are convinced about the genuineness of the WhatsApp/Telegram Groups and the fake success stories planted by members, scamsters then ask these victims to install fraudulent apps for investments. To install the apps, scamsters share the links or APK file over WhatsApp with the victim. The names of various stocks, futures, options, forex, etc. shown in these apps are the same as those of well-known companies (e.g. Reliance, Tata Power) to create an impression that the Apps are genuine.

- Siphoning the funds: To build further trust, the victim might initially get good returns on their investment as shown in the dashboard of the App, which gives them confidence and encourages them to invest more amounts. These returns are entirely fictitious and do not exist in reality. They are just numbers shown on these fake apps. As the victim invests more funds, they eventually realize that they are unable to withdraw their funds. When the victims try to withdraw their money from these apps, the scammer asks the victims to pay statutory taxes, brokerage fees, etc. which are nothing but ways to extract even more money from the victims. Once the scammer believes that they have extracted as much money as possible, they cut off all communication and disappear, leaving the victim helpless and with no recourse.

- Arrangement of SIM Cards: Scammers contact various individuals within India via Telegram groups to acquire hundreds of SIM cards illegally. There are various Telegram groups where black marketers provide SIM cards. After activation, these SIM cards are shipped abroad. These SIMs are either linked with the bank accounts of multiple shell companies or used to create and run WhatsApp accounts to defraud victims.

- Shell companies: Scammers incorporate hundreds of shell companies specifically for acquiring and siphoning off Proceeds of Crime generated from these Cyber Scams. They use the addresses of coworking spaces to provide a physical/virtual address for the incorporation of these shell companies. Further, it is revealed that during the filing of Form INC-20A (required to be filed on the MCA portal for commencement of business by the company), scammers have submitted forged bank statements as proof of share subscription by shareholders. Investigation has further revealed that the scammers operate through a network of mule bank accounts which are rented through channels such as Telegram. Investigation has revealed that the Proceeds of crime are finally converted into cryptocurrency and siphoned off abroad to avoid detection and recovery.

- Money Movement through Shell Companies: Funds are moved from the victim's account through several intermediary accounts including Mule Accounts (taken on rent by scamsters) for layering the PoC. This involves numerous transactions between accounts to create a convoluted web that conceals the source of the funds. Small transaction amounts (less than Rs. 5 lakh) are used to avoid triggering alerts for suspicious activity. The illicit funds are routed through these shell companies.

- Cryptocurrency: A key finding of the investigation is that the proceeds of these fraudulent activities were mostly converted into cryptocurrency. This conversion was a deliberate strategy employed by the accused to further obscure the origins of the illicit funds and to facilitate their transfer out of India. By converting the proceeds into cryptocurrency and transferring them abroad, the perpetrators aimed to avoid detection, tracing, and recovery by law enforcement agencies.

"The financial repercussions of falling for a share trading scam can be devastating. Many young investors report feeling embarrassed and ashamed after losing their money, which can discourage them from pursuing legitimate investment opportunities in the future," said a police official.

To combat the rise of share trading scams targeting young investors, financial literacy education is crucial, he said.