What Are the Most Common Investment Scams?
Investment scams are often characterized by offers of low- or no-risk investments, guaranteed returns, overly-consistent returns, complicated strategies, or unregistered securities. Any time an investor is intentionally deceived to make a financial decision based on false information, investment fraud occurs.
If you believe you are the victim of an investment scam, you need to know your rights. The knowledgeable investment fraud lawyers at Colling Gilbert Wright have extensive experience handling these complex cases. We have built a reputation for excellence in protecting the rights of investors and holding negligent investment entities accountable for their wrongdoing.
8 Common Investment Scams
Investment fraud lawyers deal with a wide variety of investment scams because these scams can take many forms, the most common of which include:
1. Pyramid Schemes
A pyramid scheme offers a high return very quickly for simply investing money and finding new recruits to invest as well. Focusing primarily on the recruitment of new investors is the hallmark of pyramid schemes. These types of scams can be difficult for potential investors to identify because scammers work hard to make their schemes appear to be legitimate opportunities. Regardless of promises of legitimate services or products, investment scammers use much of their acquired funds to pay early-stage investors their “returns.” Even in cases where a product is legitimate, pyramid schemes ultimately collapse when the scheme gets too big and money can longer be made to pay investors.
2. Ponzi Schemes
A type of pyramid scheme, Ponzi schemes are named for Charles Ponzi, a scammer who tricked thousands of investors in a postage stamp speculation scam in the 1920s. Similar to a pyramid scheme, Ponzi schemes use money from new investors to pay earlier investors until the scam eventually collapses. However, unlike a pyramid scheme, the underlying assets or investments usually do not even exist in Ponzi schemes. One of the most notorious Ponzi schemes in recent history involved money manager Bernie Madoff, who duped investors out of $50 billion.
3. Internet Investment Fraud
When trying to learn more about a business, the internet can be an equally helpful and harmful tool. Investment scammers can manipulate what you are able to find about them online. Scammers use several tools to spread false information on the internet to make their scams seem legitimate, including websites, social media, emails, online newsletters, and more. Internet investment fraud scammers commonly live and work outside of the United States, making it challenging to recover an investor’s funds and/or prosecute them.
4. Offshore Scams
The term “offshore scams” describes scams in which U.S. investors are targeted by scammers from other countries. While offshore scams can take a number of different forms, most involve a rule that exempts U.S. companies from registering securities with the U.S. Securities and Exchange Commission (SEC), known as “Regulation S.” These securities are exempt from registering with the SEC because they are sold exclusively outside of the U.S. to foreign or offshore investors. In these schemes, scammers resell Regulation S-classified stocks to American investors in violation of SEC rules. Because the wrongdoers operate outside of the country, it can be difficult for U.S. law enforcement agencies to investigate the scams and/or help scammed investors recover their funds.
5. Promissory Notes
Promissory notes are similar to loan agreements, although they typically contain fewer details. Generally, when investors agree to loan money to companies for a set period of time, those companies promise to pay the investors fixed returns on their investments. This is usually in the form of principal plus interest. A promissory note can be a legitimate investment. However, promissory notes that are broadly marketed frequently end up being worthless. For the most part, an established business already has a borrowing relationship with a financial institution. An investor should be cautious with these types of investments. A valid promissory note must usually be registered in the state in which it is sold and/or with the SEC – and must be sold by a licensed securities broker – therefore, you should keep an eye out for both of these attributes when considering such an investment. Schemes that involve promissory notes usually involve promises of “guaranteed” or “risk-free” returns.
6. Affinity Fraud
Affinity fraud scams prey upon members of specific groups, such as industry professionals, the elderly, the military, or ethnic or religious communities. Scammers utilizing this type of scheme may actually be members of the group they are targeting or may pretend to be a member of the group they are targeting to attain trust. Perpetrators of affinity fraud often enlist the help of respected leaders from within these targeted communities to spread the word about the scam; often making the leaders themselves unwitting victims of the fraud.
7. Market Manipulation or “Pump and Dump” Fraud
Pump and dump fraud, or market manipulation, describes when a scammer purchases shares of a low-priced stock and tries to increase the value of the stock by spreading false information. When this happens, investors typically create buying demand at higher prices while the scammer vanishes after dumping his or her shares at the higher price. While these scams were once primarily promoted by online newsletters, faxes, or cold callers, the most common methods of solicitation today are text messages and spam emails.
8. Advanced Fee Fraud
This type of scam occurs when investors invest funds for a deal to go through, expecting to receive something of greater value but wind up with nothing. To make a deal in an advanced fee fraud situation, an investor must pay a fee in advance for a lucrative business deal to close or to fund a service. However, these investors will never see their money again. Beware of terms that include words such as “incidental fee,” “commission,” or “finder’s fee,” and always research your stockbroker on a website like investor.gov.
If you suspect you are the victim of investment fraud, you must act quickly. Colling Gilbert Wright has the knowledge, skill, and resources needed to help investors recover their financial losses. Our accomplished investment fraud lawyers are committed to helping our clients achieve justice.
Call (800) 766-1000 today for a FREE consultation. We serve clients throughout Florida and Nationwide.