Becoming a high-capital investor is a big part of creating long-lasting financial well-being. Unfortunately, high-capital investors are big targets for fraudsters who are looking to capitalize on the investor’s hope of generating large returns.
Before making large investments with advisors and brokers, it is advised to learn about the pitfalls that come with working with the wrong investment advisors and brokers. Investment fraud is very real and can have a lasting negative impact on the financial future of an investor.
In order to protect oneself from investment fraud it is important to understand what investment fraud is as well as how it works. An awareness of these types of schemes will help investors avoid common pitfalls that those who work with advisors and brokers may encounter.
Investment Fraud: What It Is
At its core, investment fraud involves an individual or business intentionally deceiving another person for personal gain. Investment scams typically involve pushing various investments that encourage quick returns and low risk for large returns. These types of schemes are usually difficult to prove and expensive to pursue across borders, so victims rarely get their money back, even if there is proof the other party committed wrongdoing. The three examples detail different ways criminals run investment scams.
1. Pyramid Schemes
A person starts a pyramid scheme with the intention of attracting investors to pay up front for a certain percentage of profits they will make on sales in the future by recruiting new members to join under them and start paying fees as well. While some individuals do see some returns, most members never get anywhere because there is not enough money to go around and no product actually exists. As more people stop participating, the ones who remain will be stuck with an unsellable product that they can’t return or recover their investment from. This scam is illegal in most countries, but it is difficult to prove and catch perpetrators unless there is sufficient evidence showing wrongdoing was committed.
2. Ponzi Schemes
This scam is similar to a pyramid scheme except it uses the money from new investors to pay for past transactions and investments instead of using it all for one investment. This type of scheme usually works until enough new investors stop paying into the system or there are not enough new investors to pay off previous financial commitments. A Ponzi scheme can collapse very quickly once these conditions exist, so those who have been ripped off will only have a little time before they lose everything they invested in this type of scam.
3. Affinity Fraud
The victims targeted by affinity frauds typically know the person who swindled them, making it difficult for them to believe that their friend would do something as bad as committing investment fraud. In most cases, those working in affinity frauds are actually very good at what they do and will walk away with large amounts of money before their community realizes something is wrong.
An example of one such situation took place in 2011, when James Nicholson was sentenced to 10 years in prison for defrauding his former college classmates out of $20 million while posing as a Wall Street trader. According to Nicholson, he never intended to scam anyone but got caught up in the lifestyle that came along with running this type of scheme.
What Everyone Should Look Out For
While these scams may sound obvious upon further review, it can be difficult knowing whether or not an investment opportunity is legitimate without having all the details. Basically, an investor should look out for anything that sounds too good to be true; if the opportunity sounds like it has a better return than anything else out there and does not ask any questions regarding how or why someone would make money like that, then there is probably something wrong with the offer.
There are also other red flags an investor should look for before committing to any investment. Those who use coercion; ask for personal information such as bank account numbers, copies of identification documents such as driver’s licenses or passports, social security numbers, or birth certificates; try to get them involved in a multi-level marketing program where they need to recruit others under them in order to see returns on their investment; request large fees up front and promise huge returns later; and finally those organizations that do not have a designated physical location, contact information, or a physical office where clients can go to receive assistance are probably not safe to work with.
Help! I’m Dealing with Potential Investment Fraud Right
If you or someone you know believes that you are a victim of investment fraud and you have lost capital, there are a few steps to take in order to try and recover some of the money you have lost. The first is to contact your local law enforcement agency asap, as they will be able to assist you with getting the process started as well as provide helpful information about pursuing this type of case through legal action. You can also file a complaint with the Financial Industry Regulatory Association (FINRA) or hire an attorney specializing in investment fraud cases.
The general rule of thumb is that anyone who says something is easy, fast, and will make someone rich is probably trying to swindle them out of their money; if it sounds like too good of an opportunity, then most likely it isn’t legitimate. It is always important for people thinking about investing to make sure the person or company they are working with is not committing any sort of fraud and will be able to provide them with a return on their investment.
Become Educated on the Subject of Investment Fraud
For those who are interested in learning more about how to spot and prevent potential investment fraud, the North American Securities Administrators Association (NASAA) provides an Investor Alert page that can be found here. This site has compiled a list of various ways that investors can protect themselves from falling victim to this kind of scam and will provide helpful information for anyone looking to make an investment or trying to figure out whether or not their current financial position is legitimate.
