Mitch Anthony, author and president of Advisor Insights, recently revealed in a column for Financial Advisor magazine that he, along with his mother, had fallen victim to investment fraud, losing nearly a million dollars.
But Anthony's experience isn't uncommon.
Millions of Americans are defrauded every year, according to financial regulators.
The Federal Trade Commission announced in March that, although fraud reports declined in 2017, the losses of those who submitted complaints was significant. Americans lost $905 million to fraud, which the FTC said was a $63 million increase from the year before.
Government agencies that look out for investors, such as the North American Securities Administrators Association (NASAA) and the Securities and Exchange Commission (SEC) report the most common types of investment fraud that investors complain about are promissory notes, Ponzi schemes and unlicensed salesmen paired with unregistered products.
The SEC, in fact, has compiled a list of the most common types of fraud that consumers need to be aware of. The list is as follows:
Affinity Fraud:
Wolves in sheep's clothing is how regulators and law enforcement authorities describe these scamsters.
The affinity fraud exploits the trust and friendship that exists in religious communities, senior citizen groups, military service members, ethnic groups and other communities.
A fraudster within a community or pretending to be a part of a community lies about the details of an investment like its return or the existence of the investment. Once the fraudster takes money from new investors, he or she may use it to pay early investors to keep the scheme going for as long as possible, also known as a Ponzi scheme, or absconds the money on personal expenses.
In April, the federal courts in Houston accused a mega-church pastor and his alleged partner-in-crime, a barred financial planner, of using their trusted status to swindle investors out of more than $1 million. Allegedly, the pastor and the planner got their trusting acquaintances to invest in defaulted Chinese bonds.
To avoid affinity fraud, the SEC suggests that investors research the background of people selling investments, as well as research the investments themselves.
“Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not,” said the SEC.
Advance Fee:
This is where fraudulent investments are portrayed easy to get winners--for a fee, of course.
Fraudsters ask for an upfront payment in order to perform or execute a deal. They will use words like regulatory fee, tax, finder’s fee, commission or incidental expense to describe the bogus advance that they are asking for, according to the SEC.
Fraudsters may go as far as posing as professionals in the financial services industry, like a broker, so investors can feel more comfortable with them.
The SEC says investors should be aware that fraudsters could use official-sounding e-mail addresses that end in .gov, .mil, or fed.us to fool them. However, many fake e-mail addresses will contain .gov, .mil and fed.us but will end in .us or .org.
To avoid this scheme, investors should research the broker on sites like Investor.gov and brokercheck.finra.org.
Investors should also probe into the history of the company and how suitable the investment is for them.
Binary Options Fraud:
A thrilling new type of investment.
This is a type of options contract where the buyer bets on whether an asset's price will rise or fall within a time frame. When the contract expires, holders receive a predetermined amount of cash or zilch. The problem for the SEC is that the online trading platforms that host binary options are mostly unregulated and could be engaging in illegal activity.
The main complaints they see are from investors who have been coerced out of their deposit or cheated out of a return. It has also received complaints of identity theft and software manipulation.
Investors can check the validity of the offer and sale, and the trading platform through the SEC. To check if the trading platform is a designated contract market, investors can reach out to the U.S. Commodity Futures Trading Commission.
High-Yield Investment Programs:
The higher the yield, the higher the risk may ring true here.
This type of fraud includes an unlicensed individual convincing an investor that an unregistered investment can produce a high-yield with little to no risk.
If you are approached online to invest in one of these, you should exercise extreme caution--it is likely a fraud, warns the SEC.
Internet And Social Media Fraud:
If you want to learn about a company, the Internet and social media can be both your friend and your enemy, according to the SEC. It acts as your friend because you can get a feel for a company through its website, social media posts and the reviews that can range from great to horrible. However, it's your enemy because people or organizations can manipulate what you see about them.
Fraudsters use social media to appear legitimate through newsletters and blog posts. They also use it to collect sensitive information about you and spam you with unsolicited offerings.
Microcap Fraud:
Be skeptical of heavy stock promotions, especially if its unsolicited, says the SEC.
Microcap fraud is when a microcap stock is heavily promoted to carry out other schemes, like pump-and-dump schemes where fraudsters try to promote or “pump” the price of stock and then sell their own holdings of stock into the market. This then causes the price to fall and investors to lose money.
To avoid this fraud, the SEC says to also look out for penny stocks connected to dormant shell companies, companies that have changed their name or business multiple times, and an unexplained increase in a stock price.
Pre-IPO Investment Scams:
Fraudsters offer investors a false opportunity to buy initial public offering shares before the company goes public.
Pyramid Schemes:
Many Americans have encountered a pyramid scheme through a family member, colleague or friend, the SEC says. Though a pyramid scheme may sound similar to a multilevel marketing program where earnings are based on the amount of sales, a pyramid scheme is an illegal practice.
Participants in this scheme can only make money by recruiting new participants and they also have to buy a large inventory of a product or products.
The Federal Trade Commission advises that people be skeptical of stories where the recruiter came out of poverty and acquired wealth through the program.
"Prime Bank” Investments:
Prime Bank and Prime World Bank investments do not exist.
“They are all scams,” said the SEC.
Promissory Notes:
Promissory notes are not fraudulent, but fraudsters use promissory notes to defraud investors, especially the elderly, according to the SEC.
The North American Securities Administrator Association (NASAA) said in December that promissory notes ranked high on their investor complaint list.
Swindlers recruit independent life insurance agents, who are not licensed to sell securities, to sell the notes for a commission. The fraudsters usually pitch a high, fixed-rate return that agents then pitch to investors. Once the agents have made a sell, fraudsters then collect payment from investors, pay the agents their commission and then take off with the rest.
