With the state of the market as it is, individuals are more desperate making them more susceptible to fraudulent schemes. Investment fraud scammers are looking to take advantage of trusting individuals and will have no problem scamming folks out of their entire life savings. Therefore it is critical for people to be on the look out for common investment schemes. The Better Business Bureau (BBB) has created a list of common scams that consumers need to look out for, which include the following schemes/scams:
1) Ponzi or Pyramid Schemes: In this type of scheme, the fraudster will promise unrealistic returns to lure investors to invest. The money from new investors will then be used to pay off earlier investors to prevent earlier investors from becoming skeptical. Unfortunately, this scam will continue so long as new investors are providing funds. However, eventually, as in the Madoff Ponzi Scheme, the scam will collapse leaving all investors looking for their money.
2) Boiler Rooms: Here, scammers call from “boiler rooms” or call centers pitching worthless investments to consumers. Often these cold calls are promoting investments like penny stocks which may be worthless or being offered at inflated prices.
3) “Pump-and-Dump” Penny Stocks: In this scam, the fraudster buys up a number of penny stocks and then will fraudulently promote the stocks to unknowing investors through sending out fake “hot tips” in emails, calls, and other forms of communications. The stock price, as a result of the promotion will be driving up (the “pump”) and then the promoter will sell his own shares (the “dump”) for a large profit. Then the stock price will plummet and the investors will be left with worthless stocks.
4) Exotic or Off-Shore Foreign Investments: Often individuals fall prey to this scam, investing in oil and gas ventures, precious metals, ostrich farms, and unregistered foreign investments. Fraudsters entice individuals to invest in the above by suggesting that they can avoid certain taxes. Of course, in this case as in the other schemes, investors lose their money with no real method of recovering loss.
5) Promissory Notes: These are often promoted as high yield fixed returns on investor’s money with little risk. Although some may be legitimate, some are not and leave an investor with nothing.
6) Fraudulent Bank or Currency Investments. Here, fraudsters will promise very high returns for investing in bank or currency investments. Many times the bank doesn’t exist and investors end up losing their investment as a result of the fraud.
7) Advance Fee Stock Purchase Scams: In this scam, the investor is offered an unrealistically high price for an investment or stock that the investor already owns. Prior to the sale, however, the investor is asked to pay a large sum of money as a deposit or transaction fee. The fraudster collects the fee and then the purchase does not occur.
8) Fake Promises of Initial Public Offerings (IPOs): Investors often seek to purchase stock when it is first being offered to the public. However, be on the watch for individuals trying to get advanced fees in return for an alleged right to buy the stock earlier as an insider. Again, beware and avoid the temptation to accept such an offer.
9) “IRA or IRS Approved” Investments: Some investors are tempted to roll over an IRA investment into more profitable investments. Often they find security in the fact that their promoter promised that such investment is “IRA or IRS approved.” Where this promise is made, the investment is a fraud.
10) Investments in Fraudulent Businesses: Often folks are looking for additional household income, and are wooed by business scams which offer high returns for little time or effort. Again, beware! Avoid such offers that seem too good to be true. These business often suggest you can work at home or make money through purchasing vending machines, pay phones or ATMs.
Of course, not all investments are scams. But all investments should be researched VERY carefully and one should never become involved in investing in something on a whim. You do not want to be the investor who loses their entire life savings or even a portion in a scam like the above. Often there is no way to recover losses. However, if you have fallen victim to such a scam, it might be beneficial to contact a lawyer to determine if there is a method of recovery and to contact a tax professional to determine if there are tax implications with regard to the loss.
Jason Doss is the owner of The Doss Firm, LLC, an Atlanta-based law firm devoted to representing consumers across the country in a variety of areas including investment disputes and consumer class action litigation. Mr. Doss earned his J.D. from Florida State University in 2002 and his B.A. from the University of Florida in 1997.