Investment fraud is one of the most common white-collar crimes. In the past three years, the Justice Department has filed more than 10,000 financial fraud cases against almost 15,000 defendants. In 2009 President Obama created a federal Financial Fraud Enforcement Task Force to coordinate a crackdown on financial crimes.
Recently a promoter promised to secure a $4.5 million investment in the show “Rebecca: The Musical” in return for $60,000. He then created an elaborate ruse involving fake companies, fake investors, phony websites and bogus email accounts. Authorities finally arrested the con and shut down his operation. But “Rebecca” was $6 million in the red when its producers learned that the investors were imaginary and the $4.5 million didn’t exist.
Investment fraud includes a wide range of ways to separate people from their money. Some investment frauds are elaborate and complicated while others are disarmingly simple and brazen. In our business, we see them all. Before investing in any kind of deal, it’s crucial that you conduct a background investigation on the person proposing the investment and do thorough due diligence research on the investment entity.
Here are some of the more common investment fraud techniques:
- Ponzi or pyramid schemes – Scammers promise high returns and use money from new investors to pay previous investors. Named after Charles Ponzi, a swindler who conned $10 million from hapless investors in the 1920s, this was the technique employed by Bernie Madoff to bilk his investors.
- Pump and dump – This illegal practice involves artificially inflating the price of a stock through deceptive statements. Hucksters extol investments, funds, business opportunities, etc. on message boards and in social media sites to lure naive investors. When the price spikes, the scammer sells, knowing that the price will fall rapidly. In 2000 a 15-year-old kid in New Jersey bought penny stocks and promoted them on online message boards. When other investors bought the stocks, he sold for a huge profit. Recently this scam has become prevalent in the green-technology sector with promoters promising that some tiny, unknown stock has a game-changing technology, a huge untapped market, or a big government contract coming soon.
- Prime Bank – In this scam, fraudsters say they have access to “bank guarantees” that they can purchase at a discount and sell at a premium. Supposedly by reselling these “guarantees” several times, they can produce lucrative returns. Once unsuspecting investors send in their money they usually never hear from the con artist again.
- Promissory Notes – These are short-term debt instruments issued by little-known or nonexistent companies. The companies are generally located outside of the US, aren’t licensed to do business in the US, and lack the resources to deliver any returns. Affluent seniors are the primary targets of these scams, but no one is immune.
Swindlers are clever, flexible and audacious. They are adept at changing their scams. They may try to get you to invest in everything from real estate to assai berries, gold mines to thoroughbred horses – or just about anything else. In the last two decades the internet has made it very easy for con artists to reach millions of potential victims at minimal cost.
The best way to protect yourself against investment fraud is to be vigilant and to use common sense. Before investing, look for red flags, such as the promise of unrealistically high returns, the forecast of exponential growth or the guarantee of no risk. Other warning signs to look out for include unregistered investments, unlicensed sellers, secretive and/or complex strategies, and issues with paperwork. Always do a background check on the person who is proposing an investment and conduct in-depth due diligence on the entity associated with the investment. Know that if something sounds too good to be true, it probably is.