Common Investment Frauds: Spotting Red Flags and Seeking Recovery

April 23, 2024

Every year, investors lose billions of dollars to fraud. According to the Federal Trade Commission, consumers reported losing nearly 3.8 billion dollars to investment fraud in 2022. The actual number is likely much higher than this, as many fraud cases go unreported.

Much of the investment fraud we see today mirrors classic fraud schemes. The biggest difference is the increase in reach due to the internet and the rise of online investing. Staying educated on the most common forms of investment fraud is the first step to protecting yourself. Most investment fraud schemes share a few red flags, including promising high returns, low risk, and short time horizons. Con artists often use high-pressure tactics to get investors to act quickly. 

This blog post discusses some of the most common types of investment fraud, how to spot fraud schemes, and what you can do if you fall victim to investment fraud.

Common Types of Investment Fraud

Ponzi Schemes

A Ponzi scheme is a type of investment fraud where existing investors are paid with the capital collected from new investors. Like most investment schemes, investors are sold on the idea of high returns with little or no risk. The scheme inevitably collapses when the con artist is unable to convince new investors to commit money.

The most famous Ponzi scheme was committed by Bernie Madoff, who defrauded investors out of tens of billions of dollars over at least 17 years. His case illustrates that under certain circumstances, a Ponzi scheme can go on for years. It is important to understand that just because an investment opportunity has been available for years does not automatically mean it is not fraudulent.

Pyramid Schemes

A pyramid scheme is similar to a Ponzi scheme in that it relies on recruiting new members, who pay upfront costs “up the chain” to existing members. These recruits then go out and find new recruits, who pay their upfront costs up the chain as well. In a pyramid scheme, the people at the top typically make the vast majority of the money, while those at the bottom lose money. Like Ponzi schemes, pyramid schemes fail when they can no longer find new people to recruit, or when they are discovered and shut down by law enforcement.

Advance Fee Fraud

With advance fee fraud, investors are tricked into paying money upfront to secure a much larger gain down the road, which never materializes. Con artists use a variety of different promises to secure advance fees, including access to high-return investment opportunities that do not exist. The scammer may refer to the advance fees as membership fees, participation fees, administrative fees, taxes, or any number of arbitrary and fraudulent designations.

Pump and Dump Schemes

In a pump and dump scheme, fraudsters seek to inflate the price of a stock (or stocks) by promoting false or misleading information that makes the stock seem more valuable than it is. The perpetrators then sell off their shares at peak price before the truth emerges, causing the stock to crash. Pump and dump schemes can target any type of security, but the rise of cryptocurrency has made that industry very susceptible due to its inherent volatility.

Spotting Red Flags

As the saying goes, if it sounds too good to be true, it probably is. Some investment fraud schemes are complex, but most of them share a few common red flags. These include:

  • Unrealistic Promises: Guarantees of high returns with little or no risk.
  • Lack of Transparency: Difficulty in receiving clear information about the investment.
  • High-Pressure Sales Tactics: Urgency to invest immediately.
  • Unregistered Investments: Investments not registered with regulatory bodies like the SEC.

Recovering Your Losses

If you suspect you’ve fallen victim to an investment scam, it’s crucial to consult with legal experts who specialize in these matters. Girard Bengali, APC, is one of a select group of law firms in the nation that addresses all types of FINRA, securities and investment law matters, and we can help you navigate the complex legal landscape related to investment fraud. We are committed to fighting for individuals from all walks of life who have suffered financial losses due to deceptive investment practices. Contact Girard Bengali, APC, today to schedule a free consultation and learn about your options.

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