Wednesday, July 24, 2024

What Is Investment Fraud and How to Avoid It?

investment fraud
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If you suspect that you may have been a victim of investment fraud, you should talk to a professional investment attorney right away. 

What Is Investment Fraud?

Investment fraud is the unlawful sale of financial instruments. It involves using inaccurate or deceitful information to convince investors to sell or buy securities. Common red flags include guaranteed returns, low- or no-risk investments, and pressuring the victims to make quick decisions. 


Common Types of Investment Fraud

Pyramid Schemes

The organizers of a pyramid scheme recruit an initial round of investors and promise them payments or services in exchange for enrolling further investors. The organizers then use the money paid by new participants to pay off the earlier ones. 

As the number of investors grows exponentially, there comes a point when it gets mathematically impossible to attract new ones. The pyramid becomes too big to sustain itself and collapses, with most participants losing their money.

Some telltale signs of a pyramid scheme are:

  • A complex commission structure.
  • The investors make money exclusively by recruiting new investors.
  • No actual product or service is being sold, although a pyramid scheme may be camouflaged by a multi-level marketing (MLM) program.
  • The scheme promises easy money, a passive income, or high returns in short periods of time in exchange for doing little to no work, such as recruiting participants or placing online ads.

Ponzi Schemes

Ponzi schemes are quite similar to pyramid schemes. The organizers may promise to invest the investors’ money. In reality, however, the fraudsters do not carry out a genuine economic activity and use the funds collected from new participants to pay off earlier investors. 

Common Ponzi scheme red flags include: 

  • Promises of high returns coupled with minimal risk.
  • Unregistered investments and unlicensed sellers.
  • Not using a professional investment attorney. 
  • Complex investment strategies.
  • Issues with paperwork or receiving payments. 

Pump and Dump Schemes

A pump and dump scheme has two parts. The “pump” phase involves the fraudsters using false or misleading information to hype a particular company and boost the price of its shares. 

Then, in the second phase, the organizers sell their own shares at the now-higher price and “dump” them into the market. After the dump, the price usually drops significantly, causing investors to lose money.

Common giveaways of a pump and dump scheme include:

  • Urging investors to buy a stock quickly.
  • Promoters claiming to have inside information about an upcoming development that will be beneficial for the stock.

Affinity Fraud

Affinity fraud targets tight-knit or vulnerable groups such as religious, ethnic, and immigrant communities, and the elderly. 

The organizers of these schemes are often themselves members of the targeted group — or pretend to be. Alternatively, they may use leaders and other well-respected individuals from the community to promote the scheme in good faith. 

Affinity fraud can be extremely toxic to communities as it not only results in financial ruin but also exploits and compromises trust and friendships. What’s more, affinity fraud schemes often go undetected as members of tight-knit groups are often unwilling to share their problems with outsiders. 

Advance Fee Fraud

Advance fee fraud is just what it sounds like: the fraudster asks the investor to pay an advance fee upfront and prior to receiving any money, stock, or proceeds. The advance fee may be disguised in the form of:

  1. A tax or a commission
  2. A fee for an escrow agent or a professional investment attorney 
  3. Any other type of expense to be repaid at a later date

Advance fee fraudsters often target investors with underperforming securities, as well as people who have already lost a substantial amount of money in investment schemes. 

How to Avoid Investment Fraud

  • Do not fall for flashy websites or appearances.
    • Take your time and research any investment opportunities thoroughly. A legitimate financial adviser will not rush you into making a poorly informed decision. 
    • Do not reply to investment offers from unsolicited emails.
    • Request all the terms and conditions.
    • Be wary of doing business with companies or individuals from other countries. 
    • Learn how to recognize the telltale signs of investment fraud. 
    • Always consult with a professional investment attorney before selling or buying securities. 
    • Take steps to protect your personal information, contact details, and social media accounts online. 
    • Get to know the salesperson as much as possible before committing to an investment. Run an online search and make sure that they are licensed to deal in securities in your state. You should also check their disciplinary history in the FINRA and SEC and online databases. 
  • Always remember that when it comes to finance, if something sounds too good to be true, it probably is. Be suspicious of promises for guaranteed or quick returns.  
  • Read up on the biggest investment frauds in history to learn what to watch out for.  
  • Do not give in to pressure to sell or buy right now. This is one of the oldest tricks in the book of professional scammers. 

Final Thoughts

Learning how to invest wisely and avoid malpractices in the securities market is essential. While it is important to educate yourself and read up on the topic, the matter is too important not to seek expert help. Whether you are considering a new investment opportunity or suspect that you have been the victim of investment fraud, a professional investment attorney should always be your first point of call.

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