A clever investment scam can trick even the most experienced investors. Diligent research before handing over your money is one of the best ways to avoid an investment scam.
In addition, knowing the signs of common types of investment fraud will help protect your investments and save you time and money in the long run. There are six common investment scams.
One of the most well-known types of investment fraud is the Ponzi scheme. In a Ponzi scheme, the fraudster attracts early investors with the promise of an unusually high rate of return. Instead of investing this money, however, the fraudster pays the early investors using money from new investors, who are paid by newer investors, and so on.
Because a Ponzi scheme relies on new investments to pay existing investors, this kind of scam requires a steady stream of new investors to work. As soon as the fraudster is unable to secure new investments, or if too many investors try to withdraw their investment at the same time, the scam will fall apart.
Another well-known investment scam is the pyramid scheme. Pyramid schemes are similar to Ponzi schemes in that early investors are paid using money from later investors. The main difference is that the scam is organized in a pyramid structure.
To start a pyramid scheme, a fraudster will promise to turn a small investment into a large return. Each investor in the first group is offered the opportunity to make more money by recruiting their own investors.
Every time a new member joins, a portion of their investment travels up the chain. As the number of recruited investors grows, the organization of the scam begins to look like a pyramid with the fraudster on top.
As with a Ponzi scheme, the continuation of a pyramid scheme depends on a steady stream of new investors; if no new investors want to join, the scam will quickly fall apart.
Advance Fee Fraud
Advance fee fraud is a less well-known but common type of investment fraud. According to the FBI, the fraudster in an advance fee scheme asks victims to give “advances” to the fraudster on the promise that they will receive large gains in the future. These advances are usually in the form of taxes or processing fees.
Like with other investment scams, there is no legitimate investment underlying the fraud; rather, the fraudster takes the advance fees and disappears without providing any return to the victims.
High Yield Investment Frauds
Ponzi schemes, pyramid schemes, and advance fee frauds all have one thing in common: the promise of high rates of return with little to no risk.
While those three types of investment fraud are the most common, this same kind of promise exists in other scams involving real estate, stocks and bonds, minerals, and a number of other asset types. If you receive an unsolicited offer for a high-return, low-risk investment that seems too good to be true, it probably is.
“Pump and Dump” Scams
“Pump and dump” refers to the way a fraudster manipulates the stock market in this kind of scam. The fraudster will buy many shares of a low-priced stock in an unknown company and then circulate false information to generate interest in that company.
By doing so, the fraudster can “pump up” the price of the stock before “dumping” it at a high price, leaving other investors with the low value stock they purchased on the fraudster’s bad information.
Offshore scams involve companies based outside the U.S. Because these companies are offshore, they are not subject to the same Securities and Exchange Commission regulations as U.S. companies. Fraudsters in these scams may use any of the other methods on this list to manipulate U.S. investors.
How to Identify Common Types of Investment Fraud
Fraudsters will dress up an investment scam in clever ways to make you think it is legitimate. However, no matter what it looks like on the surface, there are some warning signs to look out for:
- The seller promises very high returns on investment;
- The seller assures you that the investment is very low risk;
- You did not contact the seller or request information about the investment (it is unsolicited);
- The seller asks for personal or confidential information, like your social security number or credit card information; and
- You feel pressured to invest as quickly as possible by the seller.
If one or more of these factors are present, you are almost certainly dealing with an investment scam. No matter how good or time-sensitive an offer may seem, always take the time to research the investment.
Are You the Victim of an Investment Scam?
If you’ve lost money to an investment fraud scheme, don’t be embarrassed. In our 40 years of experience, we’ve worked with investors of all levels who have lost money to a sophisticated investment scam. Our investment fraud attorneys will assess your case and help you recover as much as possible. Contact us today for a free consultation.