The U.S. Securities and Exchange Commission (SEC) recently announced that an Israeli-based firm must pay more than $1.7 million for misleading investors into trading binary options over the internet, and the agency warned that other firms may be out there actively trying to do the same thing.
For some background: binary options generally have an all-or-nothing payout structure in which investors bet on the increase or decrease in value of a company stock or other securities serving as the underlying asset. The options contract expires after a fixed period, and if an investor’s prediction was wrong then all of the investment can be lost.
According to the agency, EZTD not only failed to register the binary options or register as a broker-dealer to legally sell the investment to U.S. investors in the first place, but also failed to disclose on its trading platforms that there was significantly greater potential for investors to lose rather than earn money. EZTD instead made statements that extolled the profitability of trading binary options, calling it a “highly profitable trading platform” and “an extremely lucrative avenue for individuals who are looking to see an increase in income.”
The SEC found that less than 3% of the 4,000 U.S. investors who opened accounts with EZTD actually made any profit on their investment.
Stephanie Avakian, deputy director of the SEC’s Division of Enforcement, commented:
EZTD’s revenues were largely derived from customer trading losses, yet EZTD emphasized the profitability of trading in binary options. Companies dealing in binary options must disclose more than general statements about investment risk so investors in these instruments understand that the odds are stacked against them.
The SEC issued an investor alert detailing red flags that signal binary options fraud and warning investors to never put in more money in an attempt to win back money they lost, which was not an issue in the EZTD matter.