Knowledge of the most common types of investment fraud can help to curtail this type of fraud which costs Americans billions each year. Unfortunately, many of those who lose investment income are seniors who are particularly vulnerable to scams.
The U.S. Securities and Exchange Commission (SEC) website has a special section dedicated to educating investors —Investor.gov 1 A detailed explanation of 14 common types of investment fraud can be found here 2
The last blog post provided an overview of 1) Advance Fee Fraud, 2) Binary Options Fraud, 3) High Yield Investment Programs and 4) Impersonation Schemes.
Below is Part 2 of our overview of investment fraud types:
5. Internet and Social Media Fraud
Investors are frequently introduced to scams through Facebook, YouTube, Twitter, LinkedIn and other social media sites. These sites also serve as platforms for research on investment opportunities and may contain information that is not legitimate.
6. Investment Scams Targeting Groups
Investments are often pitched to seniors, ethnic groups, members of the military, religious groups and other groups by people they meet in these groups who build relationships with members for the purpose of gaining their trust and securing their cooperation on fraudulent investments.
7. Microcap Fraud
Microcap stocks are low-priced stocks issue by the smallest of companies. Information on these investments is hard to obtain so they are an easy target for investor fraud. Fraudsters can also easily manipulate the price of microcap stocks because often they don’t trade on national securities exchanges. Microcap solicitations, especially fraudulent ones, are usually unsolicited.
8. Ponzi Scheme
A Ponzi or pyramid scheme is one where new investor money is used to pay earlier investors, making it appear as if the investment is successful and legitimate when it is not.
9. Pre-IPO Investment Scams
Fraudsters encourage investors to invest in companies before they go public with an initial public offering of securities (IPO) claiming that the company is an emerging technology or industry that will provide high returns on their investments. The company may not actually exist or the company’s potential may be greatly exaggerated to get the investor to invest.
10. Pyramid Schemes
Pyramid schemes are ones where participants make money solely by recruiting new participants and where high returns in a short period of time are promised.
11. “Prime Bank” Investments
All solicitations involving “prime bank” investments are fraudulent. These purported high-yield investments will often be pitched as being issued, traded or guaranteed by the World Bank, International Monetary Fund, the Federal Reserve, or other known organizations.
12. Promissory Notes
Promissory notes are used by companies to raise money by having investors loan money to the company, usually for a very high rate of return.
13. Pump and Dump Schemes
Pump and dump schemes, usually offered on the internet, have promoters boosting the price of a stock with false or misleading claims about the company. Then, when a sufficient number of investors have bought stock the promotor quickly sells their stock and takes the profit leaving most investors with little or no profit.
14. Relationship Investment Scams
This type of scam relies on building trust with a friend or romantic partner and then exploiting the relationship for financial gain. This scam is often done through online communications or text messages.
While not every investment on this listing actually results in fraud, it is important that investors beware that there is a high likelihood that they may be taken in by a fraudster. Tools are available to help investors make good decisions.
The SEC recommends researching investments and investment professionals, understanding fees and monitoring your accounts and provides information on these important safeguards at: https://www.investor.gov/protect-your-investments 3
Securities Law Expertise for Investment Protection
If you suspect investment fraud, broker misconduct, unsuitable recommendations, or account mismanagement, we can help you understand your options. Contact our securities law firm in Royal Oak to discuss your situation.
Our securities attorneys have decades of experience representing investors in recovery matters. Call today for a confidential, no-obligation case evaluation.
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1 U.S. Securities and Exchange Commission Investor.gov website
Link: https://www.investor.gov/
2 Types of Fraud
Link: https://www.investor.gov/protect-your-investments/fraud/types-fraud
3 Protect Your Investments
Link: https://www.investor.gov/protect-your-investments