If you are reading our blog, you are most likely on the path to growing your wealth. While you are exploring various investment opportunities, you should always be on the lookout for financial scams! Trickers use a variety of tactics, and in this technological age they have even more tools at their disposal to appear legitimate. Below, we will discuss some common scams fraudsters employ to separate individuals from their hard-earned money.
Boiler Room Tactics
A boiler room scheme involves high-pressure salespeople persuading investors to purchase speculative, and in some cases, fraudulent securities. Even if the stock is real, this type of scheme is unethical, because brokers are not allowed to misinform or omit material facts when they sell securities.
Typically, the plan is to “pump and dump” a low-priced stock that the callers themselves own a lot of. The scammers get more and more investors to buy shares, so the value of the stock rises sharply. Once the price peaks, they sell their shares, the stock’s value plummets, and investors are left with worthless shares.
The scam works by having aggressive salespeople make unsolicited contact with investors via cold-calls, emails, text messages, and/or social media. They will provide only positive information about the stock and discourage customers from doing their own research. Sales staff often make exaggerated, unverifiable claims such as “it’s a sure thing,” or “it’s a once in a lifetime opportunity.” Some scammers may hint that they have insider knowledge about an upcoming merger or other event that could cause the value of the stock to rise. Other shady tactics include demanding immediate payment, manipulating the investor’s emotions, and issuing threats for noncompliance.
The term “boiler room” stems from early practices of setting up makeshift offices in the boiler room or basement of a building to house teams of cold-callers. Now, these false operations can be based from anywhere. To seem legitimate, scammers may create a fake website, rent a post office box address, and set up a toll-free number. But the fact remains, investors are being conned by unlicensed “brokers” calling from a non-existent company, selling worthless securities. By the time you realize you’ve been had, the con artists will have closed up shop and moved on to a new scam.
You should always be suspicious of callers you don’t recognize, and take the time to conduct your own research. First, look up the ticker symbol to ensure the caller is discussing an actual publicly-traded stock. Next, learn about the stock’s trading history/past performance and check the financials of the underlying company.
You will also need to thoroughly vet the callers themselves. We recommend using the free search tool on Investor.gov to see if an investment professional is legitimate. You can determine whether he or she is currently registered/licensed, review the individual’s qualifications and employment history, and make note of any suspensions, complaints, lawsuits, bankruptcy filings, or other legal proceedings.
Romance Scams
With the popularity of online dating, criminals have taken to creating fake identities to woo unsuspecting victims. Once they have contrived a romantic relationship and earned the victim’s trust, they manipulate and/or steal from their “partner.”
The scammer will seem genuine and caring when they converse via dating sites/social media, and will often make plans to meet in person. However, they always come up with excuses for failing to appear at an in-person date. Frequently, fraudsters will attempt to isolate their victims from friends or family that may encourage them to slow the relationship down.
Eventually, they will demand money. Many fake a family or medical emergency that requires urgent funds, and ask their love interest to send them money. Alternatively, a fraudster may claim to have a great investment tip and convince their partner to invest in financial scams.
To avoid romance scams, take things slow and keep your financial information private. Beware if someone seems too perfect. Red flags include asking you to quickly leave a dating service to communicate directly, repeatedly failing to meet in-person, and isolating you from your loved ones. If you have concerns, review your love interest’s photos and dating profile information and run some online searches to see if the same information is duplicated elsewhere. Do not share financial details until you have truly gotten to know your partner (in person) and trust them with banking info or cash.
Affinity Fraud
Affinity fraud happens when scammers target a group of people with common interests. They may ingratiate themselves into an existing community, such as a volunteer or religious group, or may recruit investors into a group venture. The goal is to gain people’s trust and encourage them to add their money to a (fraudulent) investment pool. Fraudsters will promise their victims high returns with little to no risk.
One example is a pyramid scheme. It is a type of fraud in which scammers require previous investors to continuously recruit new investors in order to make a profit. Pyramid schemes often involve “an investment” in the form of a right to sell a particular product or service. Each new investor pays the person who recruited them and must share the proceeds of their product sales with those higher up the pyramid. While there may be a product involved, it is important to note that the perpetrators of a pyramid scheme earn their money via new membership fees (rather than profits from sales).
A closely-related type of affinity fraud is a Ponzi scheme. Shady portfolio managers recruit investors, and pay returns to initial investors using money taken from subsequent ones. Instead of conducting real investment activities that earn interest, scammers simply transfer funds from one investor to another.
Be suspicious when someone tries to recruit you into a fund or venture that promises fast cash. A portfolio manager that advertises a “risk-free” investment with substantially higher returns than traditional investments is most likely a scammer. Be wary of any organization that demands a membership fee and promises you more money if you recruit others. If someone offers to pay you money without any actual work, it is almost always coming from new recruits lower down the pyramid. Don’t let someone confuse you with complicated investment strategies or commission structures. A legit company should have documentation such as registration/licenses and income statements proving how its revenue is generated.
Advance Fee Schemes
With an advance fee scheme, a scammer will ask his or her victim to put money upfront and promise them a larger return later. Most often these schemes come in the form of a loan or promissory note with interest, but may also involve the promise of a lump sum, goods, or services down the road. Unfortunately, the scammer simply takes the initial sum and disappears.
Advance fee fraud is often referred to as “419 Fraud” (after the article of the Nigerian criminal code dealing with fraud.) In the 1980 and 90s, victims received letters and emails purportedly from a Nigerian prince. He claimed that due to civil unrest, he had been temporarily separated from his wealth. He asked the victims for a small amount of financial assistance and promised them millions once he regained his kingdom. There are lots of variations, but often the communications come from authoritative, wealthy people such as government officials, nobility, celebrities, doctors, lawyers, or bank officials.
Other examples of advance fee schemes include loan and job offer scams. Scammers offer people with poor credit guaranteed loans or credit cards, but require them to pay a fee in advance to process the loan application. Similarly, fraudsters may offer someone a high-paying job, but require an upfront fee for background checks, training, or equipment.
Scammers frequently target investors that have already suffered losses from a risky investment. They may offer to help an investor recover their losses – for an advance fee. For example, if you are entangled in a timeshare scam with hefty maintenance fees, a scammer may offer to buy your timeshare week (or sell it for you). However, they will only help you get out of that investment if you pay an upfront fee to join their vacation club.
To avoid advance fee scams, you should always look for communications that
offer large sums of money, ask for urgent assistance, and demand upfront processing/administration fees. You should be wary of letters and emails from people or organizations you do not recognize, even if they look official.
The above are just a few types of scams out there. If you have others you would like to mention, feel free to do so in the comments. You always need to be vigilant about researching business and investment opportunities. Even when we discuss types of investments on this blog, we always insist that readers do their own due diligence before proceeding. Don’t let yourself get scammed while you try to grow your wealth!
If you are looking for more investment-related content, check out our articles Vending Machines: Easy Entry, Big Profit and Handbags Are Good Investments — Myth.