What Is Investment Fraud and How to Avoid It
You’ve likely heard the saying, “If it sounds too good to be true, it probably is.” This advice is particularly relevant when it comes to investing—yet, many Americans don’t seem to heed it. Thousands fall for investment scams every year.
There were nearly 79,000 reports of investment fraud filed with the Federal Trade Commission in 2021. That number is relatively small compared with other types of scams. However, the total lost to investment fraud in 2021 was nearly $1.7 billion. That’s the second highest total loss after imposter scams (of which there were nearly 985,000 reports) and more than the total loss of the eight other most common frauds combined.
In short, those who fall for investment scams tend to lose big. They also tend to be older, college-educated and financially knowledgeable because con artists assume these sorts of people have more money, according to the Financial Industry Regulatory Authority. Yes, even savvy adults can become victims of investment fraud.
That’s why it’s important to recognize the warning signs of investment fraud so that you can avoid becoming a victim. Here’s what you need to know about the tactics scammers use, how to protect yourself and what to do if you do fall prey to investment fraud.
Common types of investment fraud
The problem with investment fraud is that there are so many different types of it. Plus, most schemes are based on real investments, so they can appear legitimate.
Advanced fee fraud: Investors are asked to pay an upfront fee—which also might be called a tax, commission, processing fee or security deposit—to make a deal go through. Scammers often claim the funds need to be wired to their “lawyers” or “escrow agents.”
Affinity fraud: Scammers pretend to be members of a particular group they are targeting, such as a religious group or racial minority, to gain their trust and promote fake investments to them.
Cryptocurrency schemes: Cryptocurrencies are legitimate, albeit confusing, investments. However, some fraudsters claim to offer opportunities to invest in illegitimate cryptocurrencies.
High-yield investment programs: These scams involve the promise of high returns from investments with little or no risk. Sometimes, the term “prime bank” program is used.
Ponzi scheme: Organizers of this scheme promise to invest your money and generate high returns but don’t actually invest the money. Instead, they keep most of the money and use some of it to make payments to investors. The scheme collapses when they can’t find new investors.
Promissory notes: These are legitimate securities used by companies to raise money. However, there are fraudulent promissory notes sold by unlicensed individuals or companies that typically come with a promise of high returns and no risk.
Pump and dump: This scheme typically involves promoters who use the Internet to urge people to buy a stock to boost its price. The promoters then dump their shares, the price of the stock falls, and investors lose money.
Pyramid scheme: This scheme is a fraudulent multi-level marketing strategy that relies on recruiting participants who must pay fees to join a program that typically offers a fast way to make money selling products or services that don’t actually exist.
Real estate investments: Fraudulent real estate investments typically promise the opportunity to to make money fast through “property flipping” or “hard-money lending,” which is financing through a nontraditional source rather than a bank.
Social media investment fraud: Fraudsters use social media, chat rooms and online bulletin boards to gain trust and pitch investments that offer high returns with no risk.
[ See: Senior Scams and How to Avoid Them ]
Common investment fraud tactics
It can be difficult to distinguish many of the schemes listed above from legitimate investing opportunities. However, scammers tend to use common tactics to lure victims. According to the FBI, if you can answer “yes” to any of these questions, the investment opportunity you’re being offered is likely a scam.
- Does the offer sound too good to be true? A promise of high returns with little to no risk is a scam. All investments carry some degree of risk.
- Is the seller using high-pressure sales tactics? For example, are you being told that you have to act now?
- Was the investment offer unsolicited? Be wary of anyone who reaches out to you by email, mail, phone or social media with an opportunity to invest.
- Is the seller asking for your personal information, such as your Social Security number or credit card number, over the phone or online?
In addition to these red flags, be wary of sellers who can’t clearly explain what the investment they are offering is or can’t provide written documentation about the investment, such as a prospectus. And if you’re being asked to pay by a wire transfer, a gift card or prepaid card, it’s a scam.
If you’re still unsure, use the FINRA Scam Meter to find out if an investment you’re considering is a scam.
[ Read: How to Hang Up on Scam Calls ]
How to avoid becoming a victim
Before handing your money over to anyone, make sure you research the investment that is being offered and the person or company that is offering it.
Request written information, such as a prospectus, about the investment that is being offered. And get any promises or offers about the investment in writing. If the seller can’t provide any written documentation, this is a red flag. Even if the seller does provide you with information, do your own research. Use the SEC’s EDGAR database to get information about the investment being offered.
Ask the seller whether he is licensed to sell the investments he is offering in your state, then double check his claim with your state securities office. You also can use the FINRA BrokerCheck to see if the person or company offering you investments is licensed and, if so, whether there are any complaints about that person. If it’s a company that has contacted you, find out where it is incorporated by asking or checking its website. Check with the securities office in the state where it supposedly is located to verify its claim. Be wary if it’s incorporated overseas.
Most importantly, talk with someone you trust before making any investment decisions. This might be your financial advisor, accountant, attorney, a family member, or even a colleague or your boss. Taking the time to get another opinion can help you avoid jumping too quickly into a risky investment. And if you’ve been told by the seller not to tell anyone else about the deal you’re being offered, this is a definite sign that you should get others involved. Legitimate investment professionals won’t ask you to keep secrets.
What to do if you become a victim
Don’t be embarrassed if you become a victim of investment fraud. You need to report the crime as soon as possible to increase the possibility of getting your money back and helping law enforcement stop the thief from taking advantage of others.
Gather as much information as possible about what happened, including how you were approached, what the investment supposedly was, who was selling the investment and a timeline of events. The more details you can provide to local law enforcement and federal authorities, the better.
You also should report the crime to state and federal regulatory agencies, including the following:
- Federal Trade Commission: www.ftccomplaintassistant.gov
- Financial Industry Regulatory Authority (FINRA): www.finra.org, or call the Helpline for Seniors at (844) 574-3577
- North American Securities Administrators Association: www.nasaa.org or www.serveourseniors.org
- U.S. Securities and Exchange Commission: www.investor.gov or call (800) 732-0330
FINRA has a Recovery Checklist for Victims of Investment Fraud that offers more details about the steps you should take if you become a victim.
[ Keep Reading: What to Do When Your Identity Is Stolen ]
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