Investment scams have been around a long time. Bernie Madoff might have been caught red-handed orchestrating the largest known Ponzi scheme in history at an estimated 64.8 billion dollars stolen, but he wasn’t doing anything new. Charles Ponzi, the schemes namesake, was arrested in 1920 for bilking investors out of millions, and he was likely inspired by Brooklyn bookkeeper William F. Miller who used the scheme to collect a cool million in 1899.
Business Week magazine recently reported in July that the SEC had filed 34 cases of alleged investment scams, a definite up-tick from just last year. These scams aren’t necessarily increasing in number though, but rather are finding themselves exposed by the financial realities of today.
Most investment scams are difficult to spot. Madoff’s, for example, began in 1991. The scam, which pays off high returns to separate investors from the money paid by subsequent investors instead of from actual profits, probably would have kept chugging along if not for the current economic crisis which was hurt by both a lack of new investors and the curiosity of older investors wondering how their returns were so high in such a tumultuous market.
Securities fraud steals $40 billion a year from investors, per an estimate from the North American Securities Administrators Association in the Business Week article. Even though some of the bigger scams are in the headlines as those orchestrating the schemes are led from their offices in handcuffs, don’t expect the trend to slow down. Con men sense an opportune market with many folks looking for quick and easy ways to safely turn a profit. Big and small, investment scams are here to stay.
There are many different kinds of investment scams out there; here are some of the more popular:
1.Ponzi schemes – Normally target big investors, and perpetrated by “respectable” financial professionals. Promise big returns and provide them until the investor pool dries up. The only thing really being invested in though, is the scammers lavish lifestyle.
2.Internet scams – Unsolicited email offers and shady websites offering investment opportunities in non-existent companies or products.
3.Prime Bank scams – Investments offered in overseas banks that are normally exclusive to the top tiers of society and which don’t actually exist.
4.Investment seminars – A large group of potential investors, sometimes hundreds, are pitched a remarkable opportunity for a sure-thing investment in a seminar setting. Often you are expected to pay immediately, as the offer will soon be leaving town with the scammer. Along with your money if you fall for it.
5.Unlicensed Sales – Investment advice or opportunities offered to you, unsolicited, by unlicensed brokers or sales agents.
6.Affinity scams – Scammers join hobby clubs, religious groups, or specific ethnic social organizations. After gaining folks trust, they sell them on a bogus investment that has been specifically targeted to the group of victims who they are looking to exploit.
The real problem with investment scams are recognizing and separating the nefarious plots from genuine opportunities. Sometimes it can be hard to discern the scams, but there are definite red flags to be aware of and basic precautions you can take to protect yourself.
Investment scammers are going to be charming. They are going to be charismatic. They are going to be well-spoken and convincing. They are criminals, but they are also salesmen. And you are the customer.
Learn to recognize when some common signs of a scam pitch. The pitches often utilize current events the scammer read in the paper or saw on the news such as political unrest, the economic situation, and emerging technologies and new products. They will almost always have three major talking points: incredibly returns or profits from the investment, how safe and sound the investment is, and how easily you can get your principle back if needed. None of which, of course, are true.
With investment scammers so difficult to identify, what precautions can be taken? Try out the three C’s.
Compare – Whenever an investment opportunity presents itself to you compare it with similar opportunities from other firms. Don’t invest in a money market from one bank, without checking out the rates of a competitor.
Consider – Never, ever, make a purchase decision at the sales pitch. Take you time, and think
it through. Ask to be provided a prospectus which breaks down risks and potentials. Serious financial pros should make such available to you, although that doesn’t guarantee legitimacy. Research the company, the product, the security and/or stock. Investment opportunities should not be impulse buys, and if you find yourself pressured for a decision without proper consideration, you are probably being conned.
Consult – Scammers normally take advantage of those with little investment experience. Even the playing field. Talk to a professional financial advisor. Talk to your friends and family. If you have been snowed to the point of blindness by a too good to be true opportunity, have some fresh eyes you trust take a look at it. They will be much more likely to see the truth.
You can take these precautions and still find yourself scammed, so be vigilant. Question quick returns, scammers will often make out small payments right off the bat to gain more trust. Examine your reports for unauthorized transactions. Never trust promises of high returns for little risk. Repeat to yourself once again: If it’s too good to be true, it’s probably a scam.