Investment Scams

You need to be aware that there are investment frauds out there that could do serious damage to your finances. This article will help you spot and avoid some of the common persuasion tactics used by fraudsters.

Investment scams can take many forms and criminals can move fast when it comes to developing new pitches for the latest fraud. The most common securities frauds tend to fall into the following general schemes.

Pyramid Schemes - Fraudsters claim that they can turn a small investment into large profits within a short period of time.  In reality, participants make money solely by recruiting new participants into the program.  The fraudsters behind these schemes typically go to great lengths to make their programs appear to be legitimate, multi-level marketing programs.  Pyramid schemes eventually fall apart when it becomes impossible to recruit new participants.

Ponzi Schemes - A central person or "hub" collects money from new investors and uses it to pay "returns" to people who invested earlier.  They don't invest or manage the money as promised.  The scam is named after Charles Ponzi, a 1920s-era con man who persuaded thousands to invest in a complex scheme involving postage stamps.  Like pyramid schemes, Ponzi schemes require a steady stream of incoming cash to stay afloat.  But unlike pyramid schemes, investors in a Ponzi scheme typically do not have to recruit new investors to earn a share of "profits."  Ponzi schemes tend to collapse when the fraudster at the hub can no longer attract new investors or when too many investors attempt to withdraw their money during turbulent economic times.

Pump-and-Dump - A fraudster buys low-priced stock shares of a small, thinly traded company.  Then they spread false information to drum up interest in the stock and increase its stock price.  Believing they’re getting a good deal on a promising stock, investors create buying demand at increasingly higher prices.  The fraudster then dumps their shares at the higher price and vanishes, leaving many people caught with overvalued shares of stock.  Be especially wary of spam emails or text messages promoting low-priced stocks.

Advance Fee Fraud - This scam plays on an investor’s hope that he or she will be able to reverse a previous investment mistake involving the purchase of a low-priced stock.  The scam generally begins with an offer to pay you an enticingly high price for worthless stock in your portfolio.  But, in order to sell the stock, you must pay a fee. And if you pay the fee, the fraudster disappears and you never receive any money.

Offshore Scams - These scams can take a variety of forms, and it can be difficult for U.S. law enforcement agencies to investigate or prosecute criminals in other countries.

In summary, here are some simple tips: 

  • Don’t believe anyone who claims that there is no investment risk. There is always risk in investments, and no one but a con artist will tell you otherwise. 
  • Beware of promises that you’ll make big profits fast.  No one can accurately predict how an investment will perform.  Often the investments that promise the highest pay off often have the highest risk.
  • Get everything in writing.  Legitimate companies will be happy to give you all the information you need.
  • Don’t agree to anything on the spot.  Pressure to act immediately is a danger sign of fraud.
  • Don’t act on testimonials from strangers.  Someone who appears to want to share a friendly tip about a great investment opportunity may actually be a con artist trying to lure you into an investment scam.
  • Be especially wary of investments that promise rising prices of coins, precious metals, artwork, oil leases, gemstones and other commodities. The truth is that the value of these types of investments can go up or down significantly.
  • Be extra cautious about emails asking for money or offering investment opportunities.  Many unsolicited emails are fraudulent.
  • Take the time to check out investment offers.  A good place to start is with your state securities regulator.  Another resource is the federal Securities and Exchange Commission at