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Can You Spot the Unusual Warning Signs of Investment Fraud?



Have you fallen victim to investment fraud? Today, more Americans have been educating themselves, but there are still plenty who have been enticed by scams. You know the ones that promise to double your investments almost overnight or make you exponentially richer in only a few short months. Don’t be fooled by their deception. Since 2012, the Federal Trade Commission (FTC) has seen a sixty percent increase in fraud complaints, and technology coupled with traditional pensions are going on a downward trend, which leaves the average American to manage their own financial assets. You’re not alone in this. Below we’ll define exactly what investment fraud is so you can identify it before it happens.

What is Investment Fraud?

An investment fraud, also known as securities fraud, is defined by the FBI as the “illegal sale or purported sale of financial instruments.  This is when a criminal-minded individual has developed or organized a system that lures individuals to participate in schemes that offer “low- or no- risk investments” which are supposed to generate a high return and large profits.   

Depending on your age, debt level, or just your desperation to make more money, somewhere there is an investment fraud scam targeting you. Some of these scams are affinity schemes, promissory notes, currency scams, investing in precious metals such as gold, and investment seminars, better known as the “get rich quick” schemes. The most well-known scams are the Ponzi, Pyramid, and Pump and Dump scheme. While they all have a unique façade they share the same common goal… Rob you blind. So, what are these schemes exactly?

  • The Ponzi Scheme– If you’re familiar with Bernie Madoff, then you may be familiar with the pyramid scheme. Usually, clients are promised a high return with little to no risk. For this scheme to run smoothly, there must be a consistent influx of new clients so old investors can continue to get paid. Eventually, there are no more new investors to pull in and that’s when the scheme usually comes to an end.
  • The Pyramid Scheme– A pyramid scheme starts with an initial recruiter who recruits someone to invest money. This is another version of a Ponzi scheme based on recruiting bonuses. Then that new investor has to recruit a certain amount of people to make a profit from their initial investment. This continues until there aren’t any more individuals to recruit, and this usually ends like the Ponzi scam.
  • The Pump and Dump Scheme– The purpose of this scheme is to inflate the price of a stock based on inaccurate, deceptive or embellished statements. “Traders” will persuade investors to buy a specific “rising” stock, one that they themselves may have helped to increase its price on the market. The unsuspecting investor will buy into — figuratively and literally – the stock and when the “trader” thinks the stock has reached its peak, he will “dump” his shares for a large profit, which by that time it will be too late for the investor to sell.

How Can You Spot an Investment Fraud Scheme?

Sometimes it’s easy to spot these scams a mile away, but as scammers become savvier and technology is making it easier for them to target victims, the threat has risen. It’s imperative to know when you’re being scammed before it happens:

  1. Verify Their Credentials – All investment professionals must register with either FINRA, the Securities and Exchange Commission, or their state’s securities or insurance regulator. You can use the FINRA BrokerCheck to verify brokers and investors for free. While you may see positive customer testimonials, and what looks like a well-rounded website, don’t forget to read the small print.
  2. Don’t Chase “Phantom Riches” — If it sounds too good to be true, it probably is. It’s sad to say but if you’re promised big profits and guaranteed returns, then it’s most likely a scam. And as much as we would like to say we know what’s going to happen with the market, that’s just not how it works.
  3. “Everyone’s Doing It!” — When you ask for credible reasons why an investment is viable and worth buying and they can’t give you an answer, then it’s probably a scam. This strategy is usually associated with affinity scams, which target members of like-minded groups and social circles. There’s no need to jump on any bandwagons when it comes to your money.
  4. Don’t Be Rushed— Beware when they say this investment is available for a limited amount of time. Still do the proper due diligence and thoroughly research your options. This can be the difference between a great find and being duked.
  5. Never Feel Obligated—If you’re given a freebie, don’t feel like you have to make a decision or buy anything immediately. Scammers like to play on your guilt, but if you don’t want to purchase anything, don’t.  

When encountering investment opportunities, make sure you take your time, do your research, and don’t be afraid to utilize your resources to ensure you are making the best choices to benefit you and your financial life.

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