Binary Option Warnings, News And Scandal

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Binary Options Fraud

A Word of Warning to the Investing Public

Stock options. It’s a pretty common investment term meaning, in general, that one party sells or offers to another party the opportunity to invest by buying a particular stock at an agreed upon price within a certain period of time. All perfectly legal and highly regulated—and if the investor takes advantage of the opportunity and the stock performs well, there’s money to be made. And if the stock doesn’t perform well, the investor knew the risk.

But here’s another similar-sounding financial term that the public should be wary of—binary options. While some binary options are listed on registered exchanges or traded on a designated contract market and are subject to oversight by U.S. regulators like the Commodity Futures Trading Commission (CFTC), much of the binary options market operates through websites that don’t comply with U.S. regulations. And many of those unregulated websites are being used by criminals outside the U.S. as vehicles to commit fraud.

Binary options fraud is a growing problem and one that the FBI currently has in its crosshairs. In 2020, our Internet Crime Complaint Center (IC3) received four complaints—with reported losses of just more than $20,000—from binary options fraud victims. Fast forward five years, and the IC3 received hundreds of complaints with millions of dollars in reported losses during 2020. And those numbers only reflect victims who reported being fleeced to the IC3—the true extent of the fraud, which has victims around the world, isn’t fully known. Some European countries have reported that binary options fraud complaints now constitute 25 percent of all the fraud complaints received.

What exactly is a binary option? It’s a type of options contract in which the payout depends entirely on the outcome of a yes/no proposition, typically related to whether the price of a particular asset—like a stock or a commodity—will rise above or fall below a specified amount. Unlike regular stock options, with binary options you’re not being given the opportunity to actually buy a stock or a commodity—you’re just betting on whether its price will be above or below a certain amount by a certain time of the day.

For example: You expect the price of an individual stock will be above $80 at 3:30 p.m. today. So you buy a binary option that allows you to place this bet at a cost of $60. If, at 3:30 p.m., the stock price is $80.01, your payout is $100, for a profit of $40. If the price of the stock at 3:30 is $79.99, you lose your $60. Of course, you can buy multiple binary options, which can significantly increase your winnings as well as your losses.

So where does the fraud come into it? The perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money. Complaints about their activities generally fall into one of three categories:

The perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money.

  • Refusal to credit customer accounts or reimburse funds to customers. This is usually done by cancelling customers’ withdrawal requests, ignoring customer phone calls and e-mails, and sometimes even freezing accounts and accusing the customers themselves of fraud.
  • Identity theft. Representatives of binary options websites may falsely claim that the government requires photocopies of your credit card, passport, driver’s license, utility bills, or other personal data. This information could potentially be used to steal your identity.
  • Manipulation of trading software. Some of these Internet trading platforms may be reconfiguring the algorithms they use in order to purposely generate losing trades, often by distorting prices and payouts. For example, if a customer has a winning trade, the expiration time is extended until the trade becomes a loss.

Fraudulent binary options website operators go to great lengths to recruit investors. They advertise their platforms—often on social networking sites, various trading websites, message boards, and spam e-mail—with big promises of easy money, low risk, and superior customer service. Potential investors are also cold-called from boiler room operations, where high-pressure salespeople use banks of phones to make as many calls as possible to offer “once-in-a-lifetime” opportunities.

What’s being done to combat binary options fraud? The FBI currently has a number of ongoing binary options fraud cases, working with partners like the CFTC and the Securities and Exchange Commission (SEC). And this past January, the Bureau organized the 2020 Binary Options Fraud Summit held at Europol in The Hague, bringing together law enforcement and regulators from throughout North America and Europe to discuss the growing binary options fraud problem.

Special Agent Milan Kosanovich, who works out of our Criminal Investigative Division’s Complex Financial Crimes Unit, was one of the FBI’s representatives at this gathering. “The summit,” he said, “gave all of us the chance to sit down and talk about what we’ve discovered through our respective binary options fraud investigations, where the challenges are, and how we can all work together.”

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One of the biggest challenges law enforcement faces, according to Kosanovich, is the fact that the scammers are sophisticated and have operations spanning multiple countries. “So the key to addressing this type of fraud,” he continued, “is national and international coordination between regulatory agencies, law enforcement, and the financial industry.”

Another important factor, said Kosanovich, is investor awareness and education. “Investors need to be aware of the significant potential for fraud on binary options websites, and they need to make sure they do their due diligence before ever placing that first trade or bet.”

What Can You Do to Avoid Being Victimized

  • Make sure that the binary options trading platform you’re interested in has registered its offer and sale of its products with the SEC. (Registration provides investors with key information about the terms of the products being offered). To do this, you can use the Security Exchange Commission’s (SEC) EDGAR Company Filing website.
  • Check to see if the trading platform itself is registered as an exchange at the SEC’s Exchanges website.
  • Ensure that the trading platform is a designated contract market by checking the Commodity Futures Trading Commission’s (CTFC) Designated Contract Markets website. Thousands of entities promote binary options trading in the U.S., but only two are currently authorized to do so by the CFTC.
  • Check out the registration status and background of any firm or financial professional you are considering dealing with. You can do this through the Financial Industry Regulatory Agency’s BrokerCheck website and the National Futures Association Background Affiliation Status Information Center.
  • Take a look at the CFTC’s RED List, which contains the names of unregistered foreign entities that CFTC has reason to believe are soliciting and accepting funds from U.S. residents at a retail level for, among other things, binary options.
  • Finally, don’t invest in something you don’t understand. If you can’t explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.

Source: Investor.gov (SEC’s Office of Investor Education and Advocacy/CFTC’s Office of Consumer Outreach)

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Investor Alert: Binary Options and Fraud

The SEC’s Office of Investor Education and Advocacy and the Commodity Futures Trading Commission’s Office of Consumer Outreach (CFTC) are issuing this Investor Alert to warn investors about fraudulent promotion schemes involving binary options and binary options trading platforms. These schemes allegedly involve, among other things, the refusal to credit customer accounts or reimburse funds to customers, identity theft, and manipulation of software to generate losing trades.

Binary Options

Binary options differ from more conventional options in significant ways. A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yes/no proposition.

The yes/no proposition typically relates to whether the price of a particular asset that underlies the binary option will rise above or fall below a specified amount. For example, the yes/no proposition connected to the binary option might be something as straightforward as whether the stock price of XYZ company will be above $9.36 per share at 2:30 pm on a particular day, or whether the price of silver will be above $33.40 per ounce at 11:17 am on a particular day. Once the option holder acquires a binary option, there is no further decision for the holder to make as to whether or not to exercise the binary option because binary options exercise automatically. Unlike other types of options, a binary option does not give the holder the right to purchase or sell the underlying asset. When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all. Given the all-or-nothing payout structure, binary options are sometimes referred to as “all-or-nothing options” or “fixed-return options.”

Binary Options Trading Platforms

Some binary options are listed on registered exchanges or traded on a designated contract market that are subject to oversight by United States regulators such as the SEC or CFTC, respectively, but this is only a portion of the binary options market. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements. The number of Internet-based trading platforms that offer the opportunity to purchase and trade binary options has surged in recent years. The increase in the number of these platforms has resulted in an increase in the number of complaints about fraudulent promotion schemes involving binary options trading platforms.

Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in illegal activity.

Typically, a binary options Internet-based trading platform will ask a customer to deposit a sum of money to buy a binary option call or put contract. For example, a customer may be asked to pay $50 for a binary option contract that promises a 50% return if the stock price of XYZ company is above $5 per share when the option expires.

If the outcome of the yes/no proposition (in this case, that the share price of XYZ company will be above $5 per share at the specified time) is satisfied and the customer is entitled to receive the promised return, the binary option is said to expire “in the money.” If, however, the outcome of the yes/no proposition is not satisfied, the binary option is said to expire “out of the money,” and the customer may lose the entire deposited sum.

There are variations of binary option contracts in which a binary option that expires out of the money may entitle the customer to receive a refund of some small portion of the deposit—for example, 5%—but that is not typically the case.

In fact, some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect, given the payout structure. For instance, in the example above, assuming a 50/50 chance of winning, the payout structure has been designed in such a way that the expected return on investment is actually negative, resulting in a net loss to the customer. This is because the consequence if the option expires out of the money (approximately a 100% loss) significantly outweighs the payout if the option expires in the money (approximately a 50% gain). In other words, in the example above, an investor could expect, on average, to lose money.

Investor Complaints Relating to Fraudulent Binary Options Trading Platforms

The SEC and CFTC have received numerous complaints of fraud associated with websites that offer an opportunity to buy or trade binary options through Internet-based trading platforms. The complaints fall into at least three categories: refusal to credit customer accounts or reimburse funds to customers; identity theft; and manipulation of software to generate losing trades.

The first category of alleged fraud involves the refusal of certain Internet-based binary options trading platforms to credit customer accounts or reimburse funds after accepting customer money. These complaints typically involve customers who have deposited money into their binary options trading account and who are then encouraged by “brokers” over the telephone to deposit additional funds into the customer account. When customers later attempt to withdraw their original deposit or the return they have been promised, the trading platforms allegedly cancel customers’ withdrawal requests, refuse to credit their accounts, or ignore their telephone calls and emails.

The second category of alleged fraud involves identity theft. For example, some complaints allege that certain Internet-based binary options trading platforms may be collecting customer information such as credit card and driver’s license data for unspecified uses. If a binary options Internet-based trading platform requests photocopies of your credit card, driver’s license, or other personal data, do not provide the information.

The third category of alleged fraud involves the manipulation of the binary options trading software to generate losing trades. These complaints allege that the Internet-based binary options trading platforms manipulate the trading software to distort binary options prices and payouts. For example, when a customer’s trade is “winning,” the countdown to expiration is extended arbitrarily until the trade becomes a loss.

Unregistered Transactions, Operations, Broker-Dealers, or Trading Exchanges; Illegal Options Transactions

In addition to ongoing fraudulent activity, many binary options trading platforms may be operating in violation of other applicable laws and regulations, including certain registration and regulatory requirements of the SEC and CFTC, as described below.

Certain Registration and Regulatory Requirements of the SEC

For example, some binary options may be securities. Under the federal securities laws, a company may not lawfully offer or sell securities unless the offer and sale have been registered with the SEC or an exemption from such registration applies. For example, if the terms of a binary option contract provide for a specified return based on the price of a company’s securities, the binary option contract is a security and may not be offered or sold without registration, unless an exemption from registration is available. If there is no registration or exemption, then the offer or sale of the binary option to you would be illegal.

If any of the products offered by binary options trading platforms are security-based swaps, additional requirements will apply.

In addition, some binary options trading platforms may be operating as unregistered broker-dealers. A person who engages in the business of effecting securities transactions for the accounts of others in the U.S. generally must register with the SEC as a broker-dealer. If a binary options trading platform is offering to buy or sell securities, effecting transactions in securities, and/or receiving transaction-based compensation (such as commissions), it likely should be registered with the SEC. To determine whether a particular trading platform is registered with the SEC as a broker-dealer, visit the FINRA BrokerCheck website (www.finra.org/investors/toolscalculators/brokercheck/).

Some binary options trading platforms may also be operating as unregistered securities exchanges. This would be the case if they matched orders in securities of multiple buyers and sellers using established non-discretionary methods. However, there are cases where a registered broker-dealer with a trading system or platform may legitimately have no obligation to register as an exchange.

Certain Registration and Regulatory Requirements of the CFTC

It is illegal for entities to solicit, accept offers, offer to or enter into commodity options transactions (for example, foreign currencies, metals such as gold and silver, and agricultural products such as wheat or corn) with U.S. citizens, unless those options transactions are conducted on a designated contract market, an exempt board of trade, or a bona fide foreign board of trade, or are conducted with U.S. customers who have a net worth that exceeds $5 million.

To see the most recent list of exchanges that are designated as contract markets, check the CFTC website. There currently are only three designated contract markets offering binary options in the U.S.: Cantor Exchange LP; Chicago Mercantile Exchange, Inc.; and the North American Derivatives Exchange, Inc. All other entities offering binary options that are commodity options transactions are doing so illegally.

Further, entities that solicit or accept orders for commodity options transactions and accept, among other things, money to margin, guarantee, or secure the commodity options transactions must register as a Futures Commission Merchant. Entities that act as the counterparty (that is, they take the other side of the transaction from the customer as opposed to matching orders) for foreign currency options transactions for customers with a net worth of less than $5 million must register as a Retail Foreign Exchange Dealer.

Because of their lack of compliance with applicable laws, if you purchase binary options offered by persons or entities that are not registered with or subject to the oversight of a U.S. regulator, you may not have the full benefit of the safeguards of the federal securities and commodities laws that have been put in place to protect investors, as some safeguards and remedies are available only in the context of registered offerings. In addition, individual investors may not be able to pursue, on their own, some remedies that are available for unregistered offerings.

Final Words

  • Remember—much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in illegal activity.
  • Do not invest in something that you do not understand. If you cannot explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.
  • Before investing in binary options, you should take the following precautions:
    • Check to see if the binary options trading platform has registered the offer and sale of the product with the SEC. Registration provides investors access to key information about the terms of the product being offered. You can use EDGAR (www.sec.gov/edgar/searchedgar/webusers.htm) to determine whether an issuer has registered the offer and sale of a particular product with the SEC.
    • Check to see if the binary options trading platform itself is registered as an exchange. To determine whether the platform is registered as an exchange, you can check the SEC website regarding Exchanges at www.sec.gov/divisions/marketreg/mrexchanges.shtml.
    • Check to see if the binary options trading platform is a designated contract market. To determine whether an entity is a designated contract market, you can check the CFTCwebsite at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations&implicit=true&type=DCM&CustomColumnDisplay=TTTTTTTT.
  • Finally, before investing, check out the registration status and background of any firm or financial professional you are considering dealing with at FINRA BrokerCheck (www.finra.org/investors/tools calculators/brokercheck/) and BASIC Search (www.nfa.futures.org/basicnet), the National Futures Association Background Affiliation Status Information Center. If you cannot verify that they are registered, don’t trade with them, don’t give them any money, and don’t share your personal information with them.

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Binary Option Warnings, News And Scandal

It’s marketed as an investment opportunity and a route to easy money, but binary options trading can be more like betting on a coin flip without any protection for your funds. Binary options trading through regulated platforms can offer ways to bet on market movement while moderating risk. Unfortunately, the binary options landscape is full of fraud. Many investors lose money—sometimes even their entire life savings—to con artists who trick them into believing binary options are their ticket to financial gain.

Binary Options Trading

With a binary options trading strategy, the holder is effectively betting on whether the price of a particular index or asset will rise or fall versus a certain price level. If you bet right, you are paid a fixed rate of return. If the market doesn’t hit your price, you lose your investment. It’s an all-or-nothing proposition. The binary option can be a bet on the price of an index, stock, currency or some other asset. However, the binary option buyer never actually owns the underlying investment asset.

In the U.S., the Securities and Exchange Commission and Commodity Futures Trading Commission regulate binary options platforms and trading. A joint SEC-CFTC investor alert explains the win-or-lose nature of binary options trading, and cautions that not all internet-based trading platforms comply with U.S. regulatory requirements. The alert also notes that trading platforms may “overstate the average return on investment by advertising a higher average return on investment than a customer should expect, given the payout structure.”

Binary Options Fraud

The rise of illegally operated, internet-based trading platforms has opened up new avenues for scammers, and fraudulent binary options platforms are particularly common. Investors are lured into trying their hand at binary options trading, using “demo,” accounts or a modest initial investment stake. Trading takes place through platforms that seem legitimate, but are in fact are nothing but smoke and mirrors. One consistent element of these fraudulent platforms: they almost always show the investor making money—and lots of it. As “profits” grow, the scammers ask, or even demand, that you deposit more and more money.

Then the problems begin. In some cases, a fraudulent binary trader simply won’t credit or reimburse their option holders as promised. In other words, they’ll take the money and run. Or they may tell the option holder to send funds for payment of taxes or other fees in order to receive the option “profits.” Internet-based traders may also harvest credit card numbers and other personal information useful for committing identity theft.

There are also follow-up scams. Once victims have lost money on binary options, they may be contacted with false promises to help recover their funds—for an up-front fee. Scammers may even pose as government representatives claiming that the scam victim owes fines for illegal trading.

If someone contacts you claiming to be affiliated with a government agency and pressures or threatens you into sending money, treat these as warning signs of an impostor who is trying to work a scam. Be aware that the IRS will notify you by mail first if you owe money, not by phone or email, and the SEC does not charge money to help people recover investment losses.

To protect yourself from internet-based binary options scams, consider these tips:

  • Be wary of any internet trading platforms that appear to originate in foreign countries. These platforms may not be complying with regulatory requirements in your own country—and may be fraudulent.
  • Learn to spot the signs in binary options scams. The Financial Industry Regulatory Authority (FINRA), Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and Canada’s Investment Industry Regulatory Organization (IIROC) have all issued alerts about the dangers of binary options scams.
  • Call FINRA’s helpline in the U.S. to ask about potential binary options scams: (240) 386-HELP (4357).
  • If considering a purchase of binary options, carefully research the trading platform before you buy.
    • Check with CFTC to see if the binary options trading platform is a “designated” market. Call: 1-866-FON-CFTC.
    • Check with SEC’s EDGAR system to see if the binary options offering is registered with SEC, and also whether the platform is registered as an exchange. Call: 1-800-SEC-0330.
    • Use FINRA’s BrokerCheck ® to see if binary options brokers are registered.
    • According to the IIROC, in Canada” “Binary options cannot be offered or sold to retail investors in Canada.” Anyone offering such options in Canada should be reported at once to provincial securities commissions.
  • Don’t provide copies of your credit card, driver’s license, or other sensitive documents online.
  • Never pay up front money to individuals who may contact you, claiming they can help you recover an investment loss.
  • Check BBB.org’s Scam Tracker SM to read reports on how scammers operate.
  • If you think you may have encountered a binary options scam, you can file a complaint or a tip with the FBI Internet Crime Complaint Center at ic3.gov.

The BBB of Metro New York contributed to this article. Thanks to FINRA for their review.

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