Every year, investors lose billions of dollars to crooks. Educating yourself about investment fraud and the key warning signs can help avoid becoming a victim.
Watch out for anyone claiming to be a “stockbroker” or “investment advisor.” Licensed professionals must always put their client’s best interests first.
High-pressure sales
With losses associated with securities fraud costing Americans billions each year, looking out for high-pressure sales techniques and promises of low or no-risk investments is essential. It offers that sound too good to be true. Remember that no legitimate investment carries zero risk. Be especially wary of brokers who insist on providing you with a secret method to predict the market or claim to have inside information on upcoming mergers or acquisitions.
Fraudsters also rely on affinity schemes to target specific groups such as seniors, ethnic communities, and religious groups. In one example, fraudsters targeted 400 Mennonite and Amish families in New York. They used their trust in the community to lure victims with promises of high returns on promissory notes backed by bogus prime bank debt instruments.
Market manipulation or “pump and dump” scams involve fraudsters who purchase thinly traded, low-priced, speculative stocks. They then spread misleading, optimistic messages to drive up the stock price. Once the stock price reaches a predetermined level, the fraudsters sell (“dump”) their shares for a profit.
Slick brochures
Understanding the various types of investment fraud is crucial for investors to protect themselves from potential financial scams and deceptive schemes in the financial markets.
The investment fraudsters may offer investors glossy brochures, presentations in fancy settings, and high-profile endorsements or testimonials. They also promise impossibly high “guaranteed” returns. These scams often target members of a specific community, such as an ethnic, religious, career, or community-based group. They will try to win the trust of some members by offering them a small portion of the bogus investment scheme and then using them as references to persuade others to invest.
Any investment that promises a high rate of return without any risk is likely to be a scam. It is important to remember that all investments involve some degree of risk.
Investors should only give out their personal information to people over the telephone if they are sure that the person is legitimate. If a broker or investment adviser contacts you over the phone, check with your state securities department or Better Business Bureau (BBB) to see if they are registered and whether they have any complaints. Also, never give a stranger your social security number or bank account information over the phone.
Scam artists
In this type of fraud, the scam artist will promise a high return on investment in anything from exotic livestock (like emu and ostrich farming) to oil and gas investments. Many of these investments will be touted as tax-exempt securities, making them seem legitimate to a potential investor.
The scammer often uses technology to target people and spread the word about their scheme. These days, it’s easy to create a professional-looking website and even purchase lists of targeted groups with just a few clicks. Scam artists can also post on discussion forums with ease and anonymity.
Pump and Dump Schemes: Scammers buy cheap stocks and then lie to potential investors about the quality of those stocks to raise the price. The scammers then sell off the expensive stock and leave investors with worthless shares. A similar scam involves buying and selling “binary options,” contracts automatically paying a fixed reward for a yes/no investment outcome. These contracts aren’t legitimate investments and could result in huge losses.
Scam artists with high commissions
Scam artists use their fancy offices, cars, and professional receptionists to gain your trust and then try to steal your money. They often sell investments promising high returns, such as eel farms, wireless cable stock, and promissory notes claiming stable interest payments. Some even run “prime bank” schemes that involve fictitious debt instruments such as callable certificates of deposit or bonds guaranteed by the world’s top banks.
It’s also common for scammers to use independent insurance agents, financial advisers, investment seminar speakers, and accountants as sales representatives. The swindlers know these trusted experts have difficulty sorting fraud from legitimate investments.
Only trust your money to people if you can verify their valid claims. Legitimate professionals will always provide you with written documentation that clearly outlines the terms of an investment. If a swindler doesn’t have time for this or insists you must “trust them,” don’t invest. This is a sure sign of an investment fraud.
Scam artists from other countries
Investment fraud victims often suffer losses over $15,000; some have lost millions. National borders do not bind scam artists; their scams can be very sophisticated. They may use foreign language and fake documents to misappropriate funds. If you have been a victim of an international investment scam, file a report with the proper authorities. This will limit damage to your credit and financial accounts and help prevent future incidents.
Many people become complacent about investment fraud when the economy is doing well and ignore warning signs. Bull markets can lead to bold investment business practices and institutionalized securities fraud.
Look out for investment opportunities that promise incredibly high rates of return, especially if verified resources do something other than back them. Also, avoid investments with terms like “exempt” or “non-registered securities.” These investments can be kept from disclosing complete documentation and may contain false statements. Investing with an unregistered broker can be very dangerous and lead to losing money and your identity. Try an identity theft protection service to stay safe and receive suspicious activity alerts.
