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You’ve likely heard of a Ponzi scheme — a get-rich-quick scam that promises high returns on “guaranteed” investments but doesn’t actually bring about legitimate earnings. But the financial world is full of scams you may not be familiar with.
In 2023 alone, people reported losing more than $10 billion total to fraud, and more than $4 billion of those losses were to investment-related scams, according to a recent report by the Federal Trade Commission.
As technology becomes more advanced and fraudsters have more ways to scam, it’s critical to protect yourself. Read on for how to spot investment scams.
Types of Investment Scams
While every scam looks different, there are certain types of investment fraud that have popped up repeatedly over time. The Ponzi scheme, which uses money from new investors to cover debts to old investors so there are no real profits to be had, is perhaps the most well-known. Named for the infamous Charles Ponzi of the 1920s, today it brings to mind Bernie Madoff, who was found guilty of a $65 billion Ponzi scheme in 2009.
Here are other types of investment scams:
- Advance fee fraud: Advance fee fraud requires a large payment upfront — perhaps referred to as membership or participation fees for an upcoming opportunity, or payment for a future product or service — but you never receive what you were promised.
- Churning: Churning involves a broker buying and selling investments in order to generate commissions instead of for the client’s investment goals.
- Pump and dump: Especially common with penny stocks, a pump and dump scam involves fraudsters spreading false or misleading information that results in the price of an asset inflating so the fraudster can sell before the price falls.
- Insider trading: Insider trading happens when trades are conducted based on private or material information concerning a company.
Red Flags for Scams
Each scam is different, but there are certain red flags that they often share which can help you avoid falling victim to them in the future.
Remember that scammers love an easy target. When convincing you of a certain investment, they may use vague or complicated language meant to confuse and mislead you so you don’t look too deeply into the actual investment, according to the Financial Industry Regulatory Authority (FINRA). If you ask for statements or proof of recent returns, they may be ambiguous and offer bogus explanations for why they are not immediately available.
Another red flag is if an investment is deemed risk-free or if specific returns are guaranteed, according to the Securities and Exchange Commission (SEC). There are no guarantees in investing. You should especially be careful if you are pressured to commit within a certain timeframe, as legitimate advisors will allow you the time to research your options.
Another tactic scammers use is to offer exclusivity on a deal or be especially pushy. By making you feel that their offer is limited, the scammers are relying on the fact that you may be more likely to commit without crucial analysis of the situation for fear of missing out.
How to Avoid Investment Scams
While scams run rampant, there are precautions you can take to avoid falling victim.
- Maintain a healthy dose of skepticism
Scams are increasingly convincing, thanks in part to the help of technology. It’s important to approach new investing opportunities with skepticism. If you’re contacted randomly with what seems like a scam, remain calm so you have time to research the opportunity and ask for a second opinion.
- Do your research
Even if an investment sounds legitimate, you should still do your research to confirm. Start with checking all available records concerning the investment offer and the investment manager’s record to ensure their legitimacy.
Most legitimate investment professionals will be registered with public access to their records. There are several sites you can use, such as the FINRA BrokerCheck, NFA BASIC Search and the Investment Adviser Public Disclosure website. These sites provide critical information such as licensing and company background. As the SEC points out, “Unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions.”
- Look for transparency
Investment opportunities should be transparent about their performances and histories. If an investment manager is elusive or not forthcoming about key details, it is time to look elsewhere.
An investment opportunity should also come with access to important information like financial statements, so be wary of anyone that claims information is proprietary or secret.
4. Engage trusted loved ones
Scammers try to get you into a vulnerable state, such as fear or anxiety about missing out on great returns. Before you act, ask a friend or family member to review the opportunity themselves, since they won’t be in the same heightened emotional state.
What to Do If You Find a Scam
If you think you are the victim of a investing scam, it is critical to take action immediately. You may be unable to withdraw your funds from the scheme, but the proper authorities may be able to help.
As soon as you can, file a report with the SEC and Federal Trade Commission (FTC). You should also notify your state securities regulator for support on a more local basis. FINRA has a full list of steps to take if you fall victim to a scam.
Sources
Consumer Sentinel Network. (2024, April 29). Data Book 2023. Retrieved from https://www.ftc.gov/system/files/ftc_gov/pdf/CSN-Annual-Data-Book-2023.pdf.
Investor.gov, U.S. Securities and Exchange Commission. (2024, April 29). Ponzi Schemes. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/ponzi-schemes.
Office of Public Affairs, U.S. Department of Justice. (2024, April 29). Justice Department Announces Distribution of Over $158.9M to Nearly 25,000 Victims of Madoff Ponzi Scheme. Retrieved from https://www.justice.gov/opa/pr/justice-department-announces-distribution-over-1589m-nearly-25000-victims-madoff-ponzi.
Federal Trade Commission. (2024, May 16). What to Know About Advance-Fee Loans. Retrieved from https://consumer.ftc.gov/articles/what-know-about-advance-fee-loans.
U. S. Securities and Exchange Commission. (2024, May 16). Churning. Retrieved from https://consumer.ftc.gov/articles/what-know-about-advance-fee-loans.
Commodity Futures Trading Commission. (2024, May 16). Customer Advisory: Beware Virtual Currency Pump-and-Dump Schemes. Retrieved from https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/beware_virtual_currency_pump_dump.html.
Cornell Law School. (2024, May 16). Insider Trading. Retrieved from https://www.law.cornell.edu/wex/insider_trading.
FINRA. (2024, May 16.) Red Flags of Fraud. Retrieved from https://www.finra.org/investors/protect-your-money/avoid-fraud/red-flags-fraud.
U.S. Securities and Exchange Commission. (2024, May 16.) Introduction to Investing. Retrieved from https://www.investor.gov/introduction-investing.
FINRA. (2024, May 16). BrokerCheck by FINRA. (2024, April 29). Why Use BrokerCheck? Retrieved from https://brokercheck.finra.org/.
National Futures Association. (2024, April 29). BASIC Search. https://www.nfa.futures.org/basicnet.
Investment Adviser Public Disclosure. (2024, April 29). Welcome to the Investment Adviser Public Disclosure Website. Retrieved from https://adviserinfo.sec.gov/.
