Investment fraud is a crime of deception designed to lure investors, and exploit their trust to make money for the investment fraudster.
This type of financial scam can be found across all types of assets including stocks, bonds, real estate, and precious metals.
While it’s true that any marketable asset can potentially become the subject of investment fraud, the most common forms of investment fraud today are run by stockbrokers and real estate agents.
If you are not careful, investment fraud can potentially ruin your financial life. Many investment fraudsters are very good at what they do and if you want to avoid becoming a victim of investment fraud, you must know what signs to look for.
This guide will provide you with everything you need to know about investment fraud, what you should keep an eye out for, and how to protect yourself from falling victim to investment fraud.
What is Investment Fraud and how it works?
Investment fraud is when someone deceives you to make money from your investments. For example, a stockbroker lies to investors about their returns to get them to invest.
Another example is a real estate agent who steers clients into risky investments to make a commission from the deal.
Most individuals who become victims of investment fraud are victimized with a tactic called “pump and dump”.
By having direct or indirect access to an individual’s phone number, email address, or bank account information, scammers can exploit their relationships to perpetuate this type of financial crime.
Most often found in penny stocks or with initial public offerings, these scam artists buy into the market at very low prices then quickly inflate the market value by making false claims about companies’ success.
They use every trick in the book including manipulating trading volumes through online trading accounts as creating fake websites that appear legitimate. Once they have driven up the price, they sell their shares to unsuspecting investors at vast profits.
Then, once the price of a stock falls back down to its normal level, the scam artists pull out of the market and leave innocent investors holding bags of worthless stocks.
Types of Investment Fraud
There are many different types of investment fraud. While some common types of investment fraud include pyramid schemes, Ponzi schemes, and affinity scams, there are a wide variety of ways that someone can commit investment fraud.
Ponzi Schemes – are an illegal form of collective investment which is usually operated by a fraudulent investment manager.
Most often found in real estate and currency trading, Ponzi schemes use money from newly recruited investors to pay off existing investors as well as the original investor’s returns.
As long as new investments continue to be made into the system, the money keeps flowing but once recruitment stops, the entire scam falls apart and innocent victims lose their money.
Affinity Fraud – when a scam artist targets a specific group of people such as a religious or ethnic community and uses them to perpetrate fraud.
Again, these scam artists use their connections with the group members to exploit them financially.
Pyramid Schemes – similar to Ponzi schemes except instead of using collected funds for personal benefit, pyramid scheme operators often promise new investors that they will receive high returns from other participants in the system that they recruit into investing.
Crowdfunding Investment Fraud – at its core, crowdfunding is an excellent way for promising start-ups to be able to finance their businesses through online contributions.
Unfortunately, this same concept can be used by fraudsters who set up fake crowdfunding projects and promise unrealistic goals or returns on investments.
Signs that you are Investing with a fraudster
“If it sounds too good to be true, it probably is!” is a phrase investors should never forget when considering investing.
Be especially careful if you get an offer for high returns with little or no risk and if they pressure you to invest quickly by a certain deadline through limited spots available.
Also, be aware of the investments that rely on vague information, and promise exaggerated profits.
The fraudster will often claim they can provide financial services while there is no physical location from where they operate and will often offer free seminars with high returns for minimal work required on your part.
If you do find yourself investing money into a company that turns out to be fraudulent then contact either the police or the provincial securities regulator to report what happened.
If you have already lost money, investment fraud lawyers from the Frankowski Firm suggest reporting it to the police or Securities Commission, as there is a possibility they will help get your money back through legal proceedings.
It is also good to consult your lawyer to determine if you may be eligible for compensation. They will know how best to protect your legal rights from those who have now been exposed as scam artists.
Protecting yourself against investment fraud
To protect yourself from these kinds of fraud, there are a few things you can do. Firstly, do some research before making any financial commitments, especially with companies or people you do not know that well.
Try to find anything suspicious that may indicate a potential scam. Check with government agencies and/or independent organizations to determine if there is any history of legal problems, complaints, or negative press regarding this individual or business.
Also, ask about their track record and how long they have been operating. Remember even legitimate businesses will be investigated by the police now and then so do not assume that just because no one has contacted you does not mean there is nothing suspicious going on.
Speak with someone who can help you invest your money, such as a registered financial advisor, to determine the best route for your hard-earned cash.
They will be able to assist you in finding legitimate investments and make sure that your money is secure and not at risk of becoming lost or stolen.
Investment fraud has many different faces and can be perpetrated by just about anyone you know or trust which makes it all the more difficult to protect your finances from becoming victims of this type of crime.
However, if you do your homework and thoroughly research any potential investment opportunities before handing over any money, you will go a long way towards protecting yourself against these types of scams as well as other financial crimes.