Marketing Fraud

What Is Marketing Fraud?

Marketing fraud is an illegal practice that makes false or misleading promotional claims for financial gain. That includes exaggerating the qualities of a product or service in advertising, selling imitations as genuine articles, or hiding side effects or potential harms.

The goal of marketing fraud is to contact individuals to solicit money or other items in exchange for something of little or no value. One aspect of marketing fraud is some promise of monetary gain, investment returns, or other types of rewards. False advertising is another type of marketing fraud.

Understanding Marketing Fraud

Marketing fraud is one of the oldest types of fraud. It goes back much further than the snake oil salesmen who sold tonics that were "100% guaranteed to cure whatever ails you." Consumers can usually protect themselves by adhering to the adage, "If it sounds too good to be true, then it probably is." In the United States, marketing fraud is regulated by the Federal Trade Commission (FTC) as an unfair trade practice.

The internet is fertile ground for marketing fraud because of anonymity and the ability to send spam email messages. Social media marketing fraud has also become a serious issue. Marketing fraud perpetrators may not even live on the same continent as their victims.

Types of Marketing Fraud

Marketing fraud can take many forms. Bait and switch was once a common type of marketing fraud. In this scheme, a physical store would offer a particular item at a discount while having few or no actual items available. At that point, people would already be in the store and often buy something similar at the full price. Consumers became upset, and laws were passed in many areas requiring stores to have a minimum quantity of goods available at advertised sale prices. Stores that advertise sales without a sufficient quantity of goods are guilty of marketing fraud.

For investors, the most dangerous type of marketing fraud involves false claims about past performance or guarantees of safety. In the worst cases, these false claims might be high-yield investment fraud, which is a type of securities fraud. In other cases, there is a more innocent explanation. For example, a financial advisor might guarantee investors that they will not lose more than 10% in the stock market. If the advisor uses options to hedge positions and explains this to potential investors as a guarantee by the Cboe Options Exchange, then it is perfectly legal. If the advisor claims to have an infallible market-timing system, then it is marketing fraud.

While marketing fraud and mass marketing fraud are related, there is a difference between the two concepts. The main difference is mostly based on reach and the medium used to spread fraudulent claims. Marketing fraud may occur in any medium and need not reach a large number of people. In contrast, mass marketing fraud is an illegal activity that uses mass media to spread its fraudulent messaging. In theory, television, radio, the internet, and even in-person seminars are potential vehicles for mass marketing fraud. In actual practice, mass marketing fraud is usually committed via an internet-based platform, such as email, online advertisements, messaging apps, and social media. That is mostly because the internet is more cost-effective than traditional media.