Investors should always be alert to investment scams. FINRA issued an alert to warn investors about classic types of investment fraud and help them spot and avoid the persuasion tactics used by fraudsters. The following information is taken from that article:
Types of investment scams
Investment scams can take many forms, but the most common securities frauds tend to fall into the following general schemes:
- Pyramid Schemes – where scammers claim they can turn a small investment into big profits in a short period of time, but in reality, participants make money solely by recruiting new participants into the program. Pyramid schemes eventually fall apart when it becomes impossible to recruit new participants.
- Ponzi schemes – where a central fraudster collects money from new investors and uses it to pay purported returns to earlier stage investors instead of investing the money as promised. Ponzi schemes tend to collapse when the scammer can no longer attract new investors or when too many investors try to withdraw their money.
- Pump-and-Dump: When a scammer deliberately buys shares of a very low-priced stock of a small, under-listed company and then spreads false information to increase interest in the stock and increase the price of the stock. The scammer then dumps his stock at the high price and disappears, leaving many people with worthless stock.
- Advance Fee Fraud – These scams typically start with an offer to pay you a temptingly high price for worthless stock in your portfolio. To accept the deal, you have to submit a fee up front to pay for the service, but then you never see your money again.
- Offshore scams: These scams originate in another country and target US investors. Overseas scams can take a variety of forms, including those listed above. Unfortunately, whatever form an offshore scam takes, it can be difficult for US law enforcement agencies to investigate the fraud or rectify the damage to investors when the scammer is operating from outside the country. .
Fraud red flags
To avoid falling for a scam, look for these warning signs:
- Guarantees: Be wary of anyone who guarantees that an investment will perform in a certain way.
- Unregistered Products – Many investment scams involve unlicensed individuals selling unregistered securities.
- Overly consistent returns: Any investment that consistently rises month after month, or provides remarkably consistent returns regardless of market conditions, should raise suspicions. Even the most stable investments have setbacks from time to time.
- Complex Strategies: Legitimate professionals must be able to clearly explain what they are doing. It is critical that you understand any investment you are considering.
- Missing Documentation – If someone tries to sell you a security without documentation, they may be selling unregistered securities.
- Account discrepancies: Monitor your statements to make sure account activity is consistent with your instructions and make sure you know who has your assets. Fraud can occur more easily if the advisor is the custodian of the assets and the custodian of the accounts.
- A pushy salesperson: No reputable investment professional should pressure you into making an immediate investment decision or tell you to “act now.”
If you can identify the warning signs of investment fraud and know some of the most common types, you’ll be better equipped to avoid these types of scams and protect your financial future.