The Top 10 Investment Frauds

How to spot a Scam

The Top 10 Investment Frauds
May 6, 2014

Given the countless investment frauds that have been perpetrated over the years, we sometimes wonder how people still fall for them. But they do, and there may not be a better example of how even relatively sophisticated individuals and investors can be scammed than Bernard Madoff’s investment scheme that was uncovered about five years ago.

Madoff ran a classic Ponzi scheme where he was using money that was “invested” by new investors to pay off earlier investors… and line his pockets. Amazingly, Madoff kept the scam going for decades before he finally was caught, as all Ponzi schemers eventually are. Total losses by Madoff’s clients exceeded $17 billion, making it the largest such scheme ever. While more than half those losses have thankfully been recovered by federal investigators, the Madoff scam is a cautionary tale for investors everywhere.

Ponzi schemes -- named for 1920’s swindler Charles Ponzi – are just one of the top 10 investment scams of which you should be aware. According to the U.S. Securities and Exchange Commission (SEC), here are the other nine common schemes prevalent today in alphabetical order:

  1. Advance Fee Fraud — Asks for some kind of payment up front, usually in the form of a supposed tax, fee or commission that will be repaid later.

  2. Affinity Fraud — Targets members of an ethnic, religious or demographic (like the elderly) group to exploit the trust that often exists among members of these groups.

  3. High-Yield Investment Programs — Promise incredibly high returns with little or no risk via unregistered investments peddled by unlicensed salespeople.

  4. Internet and Social Media Fraud — Includes any type of investment fraud that is perpetrated using the Internet or social media.

  5. Pre-IPO Investment Scams — Supposedly offer investors the chance to purchase pre-Initial Public Offering shares of hot new stocks, especially popular Internet and social media companies like Facebook and Twitter.

  6. Pyramid Schemes — Similar to Ponzi schemes, these never actually invest money in anything. Rather, they are geared only toward recruiting new participants, usually by promising unrealistically higher returns. Some experts view high-fee, multi-level marketing organizations as little more than pyramid schemes, so if you join one, make certain to research it carefully.

  7. “Prime Bank” Investments — Often described as debentures, bank guarantees or offshore trading programs, these promise to use investor funds to buy supposed Prime Bank instruments, which in reality don’t exist.

  8. Microcap Fraud — It can be hard for investors to obtain information about microcap stocks since these companies don’t file financial reports with the SEC, which makes it easier for fraudsters to misrepresent these companies to make profits for themselves.

  9. Pump and Dump Schemes — If you saw The Wolf of Wall Street, you will understand this scam. Fraudsters pump up the price of a stock by spreading false or misleading information about it and then sell their own shares once it has gone up, making a handsome profit for themselves.

The more you know about these scams, the less likely you are to fall for them. Stay informed.

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