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How to Spot an Investment Scam in 6 Steps
Financial fraudsters use sophisticated and effective tactics to get people to part with their money. Here are six steps you can take to help you spot an investment scam.
8 common investment scams
Investment scams usually involve getting you to put up money for a questionable investment – or one that doesn’t exist at all. In most cases, you’ll lose some or all of your money. Here are some common scams.
Common investment scams
1. Advance fee scheme
In an advance fee scheme, the victim is persuaded to pay money up front to take advantage of an offer promising significantly more in return. The catch is that the scammer takes the money and the victim never hears from them again.
Scammers often target investors who have lost money in a risky investment. They’ll contact the investor with an offer to help recover their losses. They may say they will buy or exchange the investment at a substantial profit to the investor, but the investor must first pay a “refundable” fee, deposit or taxes. If the investor sends more money, they’ll lose that, too.
2. Boiler room scam
Investment scams are often pulled off by a team of people who set up a makeshift office, called a “boiler room”. To convince you their company is real, they might send you to the company’s website, which looks very professional. They might also set up a toll-free number and a respectable address to make the company seem legitimate.
However, the company doesn’t exist. Everything on the website is fake, and the office is just a post office box or temporary office. By the time you realize you’ve lost your money, the scammer will have closed up shop and moved on to another scam.
3. Exempt securities scam
When a company wants to sell securities in Canada, it must file a prospectus with securities regulators. Exempt securities are an exception. They may be sold without a prospectus, but they’re limited to accredited investors or certain other conditions.
On their own, exempt securities aren’t scams. But some scammers pitch fraudulent investments as “exempt” securities. Be suspicious if you get an unsolicited phone call or email about a hot tip on promising business that is about to “go public”. You may be told that the investment is only available to very wealthy people, but an exception will be made for you. You could be asked to sign some paperwork that misrepresents your income or net worth. If you have to lie about how much money you have, you are dealing with someone who breaks the rules.
How vulnerable are you to fraud?
4. Forex scam
The foreign exchange (forex) market is considered to be the largest and most liquid financial market in the world. Investors buy and sell currencies with the aim of making money on changes in exchange rates. But trading in foreign currencies can be very risky. Forex ads promote easy access to the foreign exchange market, often through courses or software. But foreign exchange trading is dominated by large, well-resourced international banks with highly trained staff, access to leading edge technology and large trading accounts. It’s extremely difficult to consistently beat these professionals. You may not be told how risky forex trading is.
In addition, some forex trading schemes may be illegal or fraudulent. Because forex trading services are often operated online from another country, unregulated firms may be marketing their services outside of the rules. Your money may not be invested as claimed, and you may be asked to wire money into an offshore account before you begin trading, where the money will be inaccessible. In any of these situations, you’re likely to lose some or all of your money.
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5. Offshore investing scam
This scam promises huge profits if you send your money “offshore” to another country. In most cases, the goal is to avoid or lower your taxes. Be skeptical of tax avoidance schemes – you could end up owing the government money in back taxes, interest and penalties.
There are other risks of offshore investing, too. If you move your money to another country and something goes wrong, you won’t necessarily be able to take your case to a civil court in Canada. It may be impossible to recover your money.
Not sure if it’s a scam Scam When someone tries to make money by misleading or tricking another person. + read full definition ?
Use the Scam Spotter Tool and Investment Fraud Checklist to learn how to spot the warning signs of fraud.
6. Pension scam
This scam targets people who have retirement savings in a Locked-In Retirement Account (LIRA) Locked-in retirement account (LIRA) An account that holds money moved out of a pension plan. You may use one if you are changing companies and can take your pension savings with you. It works like an RRSP, but your money is locked in. You cannot withdraw the funds until you retire. + read full definition . In most cases, you can’t withdraw money from a LIRA until you reach a certain age, usually 55 or older. There are usually limits to how much money you can take out each year, and you’ll likely have to pay tax Tax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs. + read full definition on the money you withdraw.
The scam is often promoted in ads as a special “ RRSP RRSP See Registered Retirement Savings Plan. + read full definition loan Loan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date. + read full definition ” that lets you get around the tax laws and tap into your locked-in Locked-in An account that you cannot take money out of until you retire. In most cases, you can’t get a cash payout. Your plan may make exceptions if you have a terminal illness, or a small pension benefit. + read full definition funds. To get the loan, you must sell the investments you hold in your LIRA and use this money to buy shares of a start-up company the promoter is selling. In return, the promoter promises to loan you back 60% to 70% of the money you invested. They will keep the rest as a fee. You’re told you’ll get cash, pay no tax on it, and still hold a valuable investment Investment An item of value you buy to get income or to grow in value. + read full definition in your LIRA. But the investment you buy may be worthless, and you may never see the loan. You could lose your retirement savings.
7. Ponzi or pyramid scheme
These schemes recruit people through ads and e-mails that promise everything from making big money working from home to turning $10 into $20,000 in just 6 weeks. Or, you may be given the chance to join a special group of investors who are going to get rich on a great investment. The invitation might even come from someone you know.
Investors who get into the scheme early may receive high returns fairly soon from what they think are interest cheques. They’re often so pleased that they invest Invest To use money for the purpose of making more money by making an investment. Often involves risk. + read full definition more money, or recruit friends and family as new investors.
But the investment doesn’t exist. The “interest cheques” are paid from the investors’ own money and money from new investors. Eventually, new people stop joining the scheme. There’s no more money to pay out and you don’t see another cent. That’s when the promoters will vanish, taking all the money with them.
8. Pump and dump scam
In these schemes, scammers work through lists of potential investors to promote an incredible deal on a low-priced stock Stock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions. + read full definition . You don’t know that the person or company contacting you also owns a large amount of this stock and the stock may not represent a legitimate business. As more and more investors buy shares, the value of the stock rises sharply. Once the price hits a peak, the scammer sells their shares and the value of the stock plummets. You’re left holding worthless stocks.
4 signs of a scam:
- High returns and low risk.
- Hot tip Tip The sharing of important information about a company not known to the public. + read full definition or insider Insider Every director/senior officer of a reporting issuer; every director/senior officer of a company that is an insider or subsidiary of a reporting issuer; any person/company who owns or controls more than 10% of the voting securities of a reporting issuer. + read full definition information.
- Pressure to buy now.
- Seller not registered to sell investments.
Investor Alerts and Bulletins
The SEC’s Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force (RSTF) want Main Street investors to be aware of tactics fraudsters use to lure investors into scams. This Alert presents actual videos that defendants in SEC enforcement actions allegedly used as part of their investment frauds.
Two simple steps can help protect you from being swindled in an investment scam:
- Check the background of anyone selling or offering you an investment and confirm that the person is currently registered or licensed. It only takes a few minutes using the free and simple search tools on Investor.gov. Before you hand over any money or share your contact information, verify that the person is currently registered or licensed and find out if he or she has a disciplinary history. Investors can also use SALI to find information about certain people who have had judgments or orders issued against them in SEC court actions or administrative proceedings.
- Look out for common tricks that con artists use to attract investors. Fraudsters use different means, including through promotional videos, social media, email, phone conversations, and in-person meetings, to lure victims into scams. If it seems too good to be true, it probably is. Here are a few examples of actual videos used to cheat investors out of millions of dollars (as alleged in SEC v. Atkinsonand SEC v. Montano):
- Get Rich Quickly and Easily.One of the most common gimmicks con artists use is to promise investors that they will make a lot of money in a short period of time – that they will “get rich quick.” Con artists may trick investors into believing that they will make tons of money with little or no effort (for example, for purchasing products or for performing trivial tasks, such as clicking on digital ads each day). This tactic often uses images of lavish lifestyles and luxury items to create the illusion of future riches (for example, wealth, fancy cars, mansions, yachts, vacations, etc.).
In this deceptive video, people claim they made extraordinary amounts of money that made their dreams come true by simply clicking a button on an app every day.
Viewers of this deceptive video are invited to become a member of a “Secret Millionaire Society” complete with mansions and luxury cars.
- Urgency.Con artists often claim an investment opportunity will be gone tomorrow. They create a false sense of urgency so investors turn over money “right now,” without researching the investment. They may trick investors into believing that the investment “opportunity” is limited to a certain number of investors who can get in on it or has a deadline triggered by an event that will soon occur. Some promotional videos may impose a deadline or feature a fake countdown (for example, “only 12 spots left…11…10…9….”).
An actor in this deceptive video claims, “We give a short window of just 10 minutes…between the time the links are clicked…until we remove the buy button. And we accept only 10 people per day. If those slots are gone, you will know that because you will see NO button below. But if you DO see a button below…It’s available…but you may just have seconds left to get it.”
In this deceptive video, viewers are enticed to cash in before the opportunity goes away.
- Fake Testimonials. Con artists may pay people to post fake online reviews or appear in videos falsely claiming to have gotten rich from some investment opportunity. Even testimonials that appear to be independent and unbiased reviews – for example on a website purporting to “review” products and investment opportunities – may be part of the scam.
The narrator in this deceptive video claims he is “for real” and his bank account grew by $8,500 the first day.
This deceptive video includes purportedly ordinary people who claim that they became millionaires in just 3 months. The SEC’s complaint in SEC v. Atkinson alleges that the narrator and purported millionaires in this video are paid actors.
Never rely solely on testimonials in making an investment decision. Also, depictions of skyrocketing investment accounts often are fake. The potential for high investment returns usually involves high risk. Promises of high investment returns, with little or no risk, are classic warning signs of fraud.
Don’t be hoodwinked if someone tries to use these lines on you. If you suspect that someone is trying to rip you off with an investment scam, protect yourself and others – report it to the SEC.
Don’t Be Fooled By These 3 Money Scams
It’s surprisingly easy to fall prey to a financial con, and not just because we want to believe that we, too, can get rich quick.
Even if you’re making sincere efforts to save and invest for your future, it can be hard to get ahead financially. Making that task even harder is that many of us occasionally fall for scams that can rob us not only of money but also of time and energy.
Here, then, is a review of three money scams that you might run across, with tips for spotting them and avoiding them and other financial scams.
Image source: Getty Images.
The penny-stock pump and dump
Penny stocks ensnare many investors — especially newer and less sophisticated ones. That’s because if you don’t understand some investing basics, they can seem like wonderful opportunities.
A penny stock is one that’s trading for less than about $5 per share. Such low prices can make it seem like the stock is a bargain — to those who don’t understand that a stock’s price alone means little. A $1 stock can still plunge and become a $0.25 one. And a $200 stock can always grow into a $400 one.
Penny stocks are usually tied to unproven, volatile companies, often with little to no earnings. And while the companies themselves may be entirely legitimate — albeit young or small — their stock prices are easily manipulated by scammers because they have relatively small market caps, and don’t usually trade heavily.
The classic pump-and-dump maneuver is an unfortunately great example: First, the ambitious con artists buy lots of shares of a penny stock, then starts hyping the company in newsletters, online, in day trader chat rooms, and elsewhere. They’ll present a compelling story, claiming that the company is on the verge of curing cancer, proving a new oil field, or exploiting some other figurative gold mine.
Naive investors will get excited, start buying shares, and push the price higher. The rising prices will often excite further investors to buy in too, adding more hot air to the bubble. The scammers will then quickly sell their shares at the inflated prices and reap the profits. Afterward, they turn off the hype machine, (and the company may publicly debunk the rumors) share prices fall back to their natural levels, and those who took the bait get stuck with the losses.
You can avoid penny stock heartaches simply by steering clear of companies with very low share prices — no matter how much you might love to own, say, 5,000 shares of a company for only $500. Also, beware of compelling stories that seem too good to be true. If the stock is really so great, those in the know would be buying all the shares they could, not telling others to do so.
There may be fewer Ponzi schemes out there than penny stock cons, but it’s valuable to be able to spot their characteristics — because there are some criminals out there using the model. The most famous one — they tend only to become famous after their frauds unravel — is now-jailed Bernie Madoff.
Ponzi schemes claim to offer high and consistent returns via “secret” investing strategies or other vague but profitable-sounding techniques — but in fact, they are cooking the books, and using the money from new investors to create illusory “profits” for the earlier ones. The investors’ assets aren’t growing, of course. There’s no savvy money management nor clever investing tactics — just schemers moving funds around behind the curtain, and siphoning off large amounts of it for themselves. But at some point, investors in need of their funds will invariably attempt to cash out more than the fraudsters have left in the tank, and if the new money has dried up, the whole thing will implode as con artists have to admit they can’t pay their investors what they’ve been promised.
Per the Securities and Exchange Commission, here are some signs of a Ponzi scheme. (These red flags apply to many other kinds of scams, too.)
- Low risk, high returns: If you’re presented with any investment opportunity that’s described as offering very low risk and very high returns — or, worse, an opportunity that’s “guaranteed” to deliver high returns, beware. In general, high potential returns are linked to high risk. Lottery tickets, for example, feature a high possible reward, but a much higher risk of losing all the money you spend on them, while government bonds offer a relatively low rewards, but little risk.
- Unregistered investments: Any time you plan to park your hard-earned dollars in an investment, make sure that it’s registered with the SEC or state regulators. As the SEC explains, “Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.” Look into the registration status of any unusual investment opportunity you’re offered — do not just take the seller’s word for it.
- Unlicensed sellers: Federal and state laws require people and companies selling investments to be registered or licensed. Ask about the status of anyone you’re dealing with, and then verify it.
- Complex and secret strategies: How will your friendly fraudsters deliver those massive returns they promise? Naturally, it’s because they’ve found a secret formula. It’s complicated. They could show you the math, but it’s proprietary and you wouldn’t understand it anyway. Just. trust them. (Well, they can’t just come out and tell you that they’re scamming you, right?) If you don’t understand an investment, stay away from it.
- Paperwork problems: Solid investment companies have solid reporting systems, regularly sending accurate and statements to investors that are relatively easy to understand. If you’re not getting statements on time, or if you’re spotting errors or confusing things in them, that’s not professional or reassuring. Take a closer look, and ask questions.
- Difficulty receiving payments: If you experience any resistance when trying to withdraw money, or you’re don’t receive promised payments on time, that’s a huge red flag. If, when trying to withdraw money, you’re offered even better returns to stay invested, that’s another warning sign.
- Unnaturally consistent returns: Ponzi schemes and other scams often feature very consistent returns — but that deserves your skepticism, not admiration. Yes, over long periods the stock market has always tended to go up, but from week to week and year to year, its results are lumpy, and even the most clever hedging strategy can’t turn those lumps perfectly smooth. The table below lists the S&P 500’s returns over the past 18 years, clearly showing why any investment tied to the stock market is likely to feature varying returns, not consistent ones.
Common Investment Scams
Investment Seminars and Financial Planning Activity
Scam Artists use investment seminars and pose as financial planners offering appealing and farfetched investment advice to the unsuspecting investor. Much of the advice they give during these seminars may require them to be licensed or registered, and they may fail to disclose conflicts of interest, as well as hidden fees and commissions. The extra fees or phony investment opportunities are usually not discovered by the investor until it is too late.
A contract written by a life insurance company to provide continuing income for a specified amount of time. Payments are generally made on a monthly basis or in periodic installments, in most cases to supplement retirement income. Investors are often induced into buying annuities that are unsuitable, misguided and inappropriate for their situations. Because annuities can be a vital form of financial protection for seniors, the misleading and ill-advised information given to them can be devastating.
Illegal securities Offered as Individual Retirement Account (IRA) Investments
Increasingly, unscrupulous self-directed IRA custodians are offering to hold unlawful and fraudulent securities in IRA accounts. When the fraudulent or illegal nature of the securities becomes clear, investors may not only lose their entire investments, but may be faced with additional IRS and administrative penalties as well. Many investors believe that just because an investment is being held in an IRA account, it is safe and legal. Investors must ensure that the investment is properly registered and is being offered by a properly licensed salesperson’
Whenever a promoter accepts IRA money there is an imputed credibility to the deal. People wrongly assume that if retirement money can legally be deposited in a certain deal, then that deal must have been “checked out by the IRS and blessed as legitimate.”
These higher-yielding certificates of deposit won’t mature for 10-20 years: unless the bank, not the investor, “calls” or redeems them. Redeeming the CD early may result in large losses — upwards of 25% of the original investment. Sellers of callable CDs often don’t adequately disclose such risks and restrictions to investors.
Promissory Note scams offer investors a promise of high returns at low risk. They are often sold by independent insurance agents. Many of the notes are short-term debt instruments issued on behalf of a fraudulent institution or companies that don’t exist, each promising high returns upwards of 15% monthly — with little or no risk, typically with a maturity of 9 months.
Predatory lending consists of a variety of home mortgage lending practices, where predatory lenders will pressure consumers into signing loan agreements that are not in the consumers best interest or that they cannot afford. The scam artist may use a combination of false promises and deceptive sales practices to convince the borrower to commit before they are able to have full knowledge of the agreement.
Prime Bank Schemes
Scam artists promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. Users of these types of schemes often target conspiracy theorists, promising access to “secret” investments used by the Rothchilds or Saudi royalty.
The Internet’s wide reach and supposed anonymity are two attractive features for scam artists. They use the Internet for a wide variety of scams including pyramid schemes; promotion of bogus “prime bank” investments; and enhancing the sale of thinly traded stocks. The Attorney General urges investors to ignore anonymous financial advice on the Internet, via e-mail or advertisements.
Affinity Group Fraud
Affinity fraud occurs when scam artists use their victim’s religious or ethnic identity to gain their trust, knowing that it’s human nature to trust people who are like you. Advertising in the media that serves specific ethnic groups is used to identity potential victims, often with offers of employment, training or financial advice. Often, however, the scheme is perpetuated by simple word of mouth.
Ponzi schemes are swindles in which tremendous rates of returns are paid to initial investors out of funds from later investors, who end up losing all of their money when the house of cards falls down. A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all emphasis on bringing in new members/investors and not on selling the product or service.
Common elements of a pyramid scheme:
- An invitation from a friend, neighbor, or co-worker to attend an “opportunity meeting”
- A well-rehearsed presentation that offers an exciting shortcut to wealth and adventure
- Hefty fees for products, courses, etc., or for the right to recruit others and profits from their participation
- An emphasis on recruiting others to keep the pyramid growing.
Viatical Investment Scams
Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in the final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker. These investments are extremely high risk, particularly for seniors.
Named after the rented office spaces they use to “turn the heat up” on potential investors, these fly-by-night operations rely on “cold calls” and fast talking to make their sales. Boiler rooms are great vehicles for scammers because it is often difficult to distinguish scams from a legitimate developmental business. Warning signs that you may be the target of a boiler room schemes include:
- strangers calling you from another state trying to sell you unfamiliar investments;
- vague and automatic responses to all of your questions;
- refusal to disclose the street address of the office, instead referring potential customers to drop boxes; and
- high pressure sales tactics, such as claiming that the opportunity will vanish if you don’t invest immediately
Precious Metals Deals
Precious metals have always attracted investors. Such tangibles as gold and silver seem particularly appealing to investors during uncertain times. Con artists urge jittery investors to put their savings into something they can hold on to rather than paper investments such as stocks and 55 bonds. There are several examples of precious metals schemes:
So called “rare coins” are often sold to unwary investors who are led to believe that they are a good investment that will increase in value over the years. Representations made about the expected increase in the value of these coins are almost always untrue and part of a scam perpetrated against unsophisticated, often elderly victims. Such scams are conducted out of “boiler rooms” from which unscrupulous salespeople with no expertise in the coin market make hundreds of unsolicited phone calls to people whose names appear on so-called “sucker lists.”
The salespeople use high-pressure sales tactics and convey a sense of urgency about closing the deal. They also misrepresent the value of the coin, its scarcity and where it was obtained. For example, a victim may be misled into believing that the coins were recently obtained through an exclusive estate sale and are in very short supply. A common tactic used by these scamsters is to falsely promise to rebroker or resell the coins to another investor for a profit so that the victim is led to believe that he or she cannot lose money. Often, these coins are delivered in poor condition or are never sent at all.
Gold mining schemes
How does gold, silver or platinum at dirt-cheap prices sound? That is the promise of swindlers who claim to be able to sell precious metals directly from mines. They claim that a new technology will be used to recover trace amounts that other firms have not been able to retrieve.
How can swindlers avoid delivering when they promise gold bars? One popular stalling tactic: They offer bullion storage services where a consumer supposedly buys precious metals in bullion form and then has them stored in a vault. This is an open invitation to fraud. In one major scam, con artists simply pocketed millions of dollars of investor
funds and never bought gold.
Stock swindles- -Pump and Dump Schemes
Swindlers tout a company’s stock (typically cheap stock — less than $5) through false and misleading statements to the marketplace. Usually a small group of informed people buy a stock before they recommend it to thousands of investors. They may claim that a company has developed a cure for AIDS or is about to announce a huge business deal that will cause its stock to double or triple in value. The result is a quick spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock early sell-off when the price peaks at a huge profit. Most pump-and-dump schemes recommend small companies which are more volatile making it easier to manipulate a stock because there’s little or no information available about the company. After pumping up the stock, fraudsters make huge profits by dealing their cheap stock on the market. The remaining shares can become worthless.
A recent variation on this scheme is that messages are left on telephone answering machines misleading the recipient of the call into believing that he or she is accidentally overhearing a message telling a third party about a “tip” on a stock. The same is being done with faxes which are meant to appear as if they had been sent to the wrong party. Apparently people fall for this trick, perhaps because they think they are getting something for nothing.
Phony International Investments
With the strong performance of many foreign stock markets, many American consumers are investing some of their funds abroad. Con artists have responded by offering scams with an international flair. In one case, con artist fleeced 400 investors out of $7 million by promising 30 to 40 percent returns on certificates of deposit and other investments through a bank in the Marshall Islands. In fact, the bank existed only on paper and its sole officer was a Marshall Islands gas station attendant who picked investors’ checks and mailed them back to the con artist. Even when U.S. investors deal with legitimate investment opportunities overseas, they remain vulnerable to such factors as loose or nonexistent investor protection regulation, currency fluctuations, limited opportunities to pursue grievances and political instability in some nations. Smart investors will exercise extreme caution before putting money into any foreign investment.
Bogus Franchise and Business Opportunities
The dream of being your own boss is the primary appeal of franchises and business opportunities. Con artists realize that the desire of many Americans to own their own business may make them less cautious when it comes to evaluating franchises and business opportunity deals. Such investments may be promoted on the basis of the fear of losing a job or general uneasiness about the economic situation.
Ads for fraudulent business opportunity schemes may appear in otherwise reputable television programs, newspapers and magazines. Investors incorrectly assume that because the media outlet is reputable the advertisers are as well, not realizing that the media outlet may not screen its advertisers. Ads for frauds often offer high income to the person who will invest enough to cover individual start-up costs, ranging from $50 to several thousand dollars. The only people who make money are the swindlers who receive the start-up investment money. Fraudulent business opportunity ads frequently appeal to people who have few job skills and are desperate for money. Examples include work-at-home and animal raising schemes.
Unregistered Investment Products
Con artists bypass state registration requirements to pitch such products as pay telephone and ATM leasing contracts and other investment contracts with the promise of “limited or no risk” and high returns.
Unlicensed Individuals Selling Securities
Anyone selling securities without a valid securities license should be a red flag for investors. Ask the seller to complete the “Check Before You Invest Form.”
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