Investment fraud comes in a variety of forms. Whether you are new to investing or have been investing for many years, you should know about the different types of fraud. The following list will help.
Affinity frauds target members of groups, such as the elderly, or religious or ethnic communities. The fraudsters often are or seem to be – members of the group. These scams exploit the trust found in small groups and, because of the tight-knit structure of many groups, victims may try to work things out within the group rather than notify authorities or pursue legal remedies.
Affinity scams often involve “Ponzi” or pyramid schemes where new investor money is used to pay earlier investors, making it appear as if the investment is successful and legitimate.
Charles Ponzi, the namesake of the scheme, targeted the Italian community.
Advance Fee Fraud
Advance Fee Frauds ask investors to pay a fee up front, before receiving any proceeds so that the deal will go through. The advance payment may be described as a fee, tax, commission, or incidental expense that will be repaid later. Fraudsters may direct investors to wire advance fees to escrow agents or lawyers or try to fool investors with official-sounding websites and e-mail addresses. These frauds may involve the sale of products or services, the offering of investments, lottery winnings, found money, or many other so-called opportunities.
A binary option is a type of options contract or a contract that allows the holder to buy or sell an underlying security depending on whether the price of a particular asset will rise above or fall below a specified amount. Once the option is acquired, there is no further decision for the holder to make regarding the exercise of the binary option because binary options exercise automatically. Unlike other types of options, a binary option does not give the holder the right to buy or sell the specified asset. When the binary option expires, the option holder receives either a pre-determined amount of cash or nothing at all.
High Yield Investment Programs
A simple search on the Internet will find any number of so-called “high-yield investment programs.” The Internet is overflowing with so-called “high-yield investment programs” or “HYIPs.” These are unregistered investments typically run by unlicensed individuals – and they are often frauds. The way to spot a HYIP scam is the promise of returns as high at 30% with little or no risk to the investor. Some of these scams may use the term “prime bank” program. If you are approached online to invest in one of these, beware – it is likely a fraud.
Internet and Social Media Fraud
Many investors use the Internet and social media to help them with investment decisions. While these online tools can provide many benefits for investors, these same tools can make attractive targets for criminals. It’s easy to make their messages look real and credible and sometimes hard for investors to tell the difference between fact and fiction. That’s why you should think twice before you invest your money in any opportunity you find online. Social media, such as Facebook, YouTube, Twitter, and LinkedIn, are tools for investors. Fraudsters can use social media in their efforts to appear legitimate, to hide behind anonymity, and to reach many people at low cost. Remember if it sounds too good to be true, it probably isn’t.
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. Like Pyramid Schemes, participants attempt to make money solely by recruiting new participants, usually where:
· The promoter promises a high return in a short period of time;
· No genuine product or service is actually sold; and
· The primary emphasis is on recruiting new participants.
When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
Prime Bank Investments
If you are approached about investing in a so-called “Prime Bank” program, “Prime World Bank” financial instrument, or similar high-yield security, you should know that these investments do not exist. They are all scams.
Pump and Dump Schemes
“Pump and dump” schemes have two parts:
· Promoters try to boost the price of a stock with misleading statements about the company. Once the stock price has been pumped up,
· They move on to the second part, seeking to profit by dumping their holdings of the stock.
These schemes often occur on the Internet where the promoters will claim to have “inside” information about a development that will up the price of the stock. After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.
There are a number of other investment fraud schemes such as Promissory Notes, Pre-IPO Investment Scams out there to take advantage of your desire to invest. If you have questions about Investment Fraud Schemes or about your stockbroker’s management of your account, please contact me at: 313-962-7777 for a case evaluation.