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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.

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.”

“Callable” CD’s
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 Notes
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
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.

Internet Fraud
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/Pyramid Schemes
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.

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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.

Boiler Rooms
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:

Coin Swindles
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.

Bullion deals
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.”

Zeissbank.com Review: Is Zeiss Bank Scam or Should I Invest?

An official website of the United States government

Here’s how you know

The .gov means it’s official.
Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.

The site is secure.
The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

Ask questions. Fraudsters are counting on you not to investigate before you invest. Fend them off by doing your own digging. It’s not enough to ask for more information or for references – fraudsters have no incentive to set you straight. Take the time to do your own independent research. For more about information see Ask Questions.

Research before you invest. Unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions. Understand a company’s business and its products or services before investing. Look for the company’s financial statements on the SEC’s EDGAR filing system. You can also check out many investments by searching EDGAR.

Know the salesperson. Spend some time checking out the person touting the investment before you invest – even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary history of brokers and advisers for free using the SEC’s and FINRA’s online databases. Your state securities regulator may have additional information.

Be wary of unsolicited offers.Be especially careful if you receive an unsolicited pitch to invest in a company, or see it praised online, but can’t find current financial information about it from independent sources. It could be a “pump and dump” scheme. Be wary if someone recommends foreign or “off-shore” investments. If something goes wrong, it’s harder to find out what happened and to locate money sent abroad.

Protect yourself online. Online and social marketing sites offer a wealth of opportunity for fraudsters. For tips on how to protect yourself online see Protect Your Social Media Accounts.

Know what to look for. Make yourself knowledgeable about different types of fraud and red flags that may signal investment fraud.

Red flags for fraud and common persuasion tactics

How do successful, financially intelligent people fall prey to investment fraud? Researchers have found that investment fraudsters hit their targets with an array of persuasion techniques that are tailored to the victim’s psychological profile. Here are red flags to look for:

If it sounds too good to be true, it is. Watch for “phantom riches.” Compare promised yields with current returns on well-know stock indexes. Any investment opportunity that claims you’ll receive substantially more could be highly risky – and that means you might lose money. Be careful of claims that an investment will make “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk!” Claims like these are hallmarks of extreme risk or outright fraud.

“Guaranteed returns” aren’t. Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. If your money is perfectly safe, you’ll most likely get a low return. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” They try to plant an image in your head of what your life will be like when you are rich. Don’t believe it.

Beware the “halo” effect. Investors can be blinded by a “halo” effect when a con artist comes across as likeable or trustworthy. Credibility can be faked. Check out actual qualifications.

“Everyone is buying it.” Watch out for pitches that stress how “everyone is investing in this, so you should, too.” Think about whether you are interested in the product. If a sales presentation focuses on how many others have bought the product, this could be a red flag.

Pressure to send money RIGHT NOW. Scam artists often tell their victims that this is a once-in-a-lifetime offer and it will be gone tomorrow. But resist the pressure to invest quickly and take the time you need to investigate before sending money.

Reciprocity. Fraudsters often try to lure investors through free investment seminars, figuring if they do a small favor for you, such as supplying a free lunch, you will do a big favor for them and invest in their product. There is never a reason to make a quick decision on an investment. If you attend a free lunch, take the material home and research both the investment and the individual selling it before you invest. Always make sure the product is right for you and that you understand what you are buying and all the associated fees.

Where can I go for help?

If you have a question or concern about an investment, or you think you have encountered one of these frauds, please contact the SEC, FINRA, or your state securities regulator to report the fraud and to get assistance.

U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295

Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, MD 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290

North American Securities Administrators Association (NASAA)
750 First Street NE
Suite 1140
Washington, DC 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571

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.

Ponzi schemes

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.
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