According to a recent FBI report, Americans lose more than a billion dollar each year in fraudulent investment schemes. Many investors spend their income and savings on illegitimate and unreliable real estate, Internet schemes, stocks and bonds, and even artifacts.
There are stringent securities fraud laws that regulate investment fraud in the United States and are aimed at identifying and eradicating fraudulent schemes, along with educating people without the financial know-how of investment traps.
The Federal Trade Commission works with the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS) to ensure the implementation of laws, and that adequate investigation is conducted to determine the violation of laws by individuals/businesses.
Many people jump at the first opportunity to invest in schemes that promise above-market returns, without even doing a background check. Hiring a financial expert or a broker to help you with such deals can be an easier option, but you need to be even more cautious when trusting a third party with your money. In no time, you can become a victim of a Ponzi scheme or an Internet fraud, and be ripped off a large amount of money.
Read on to know about some of the prevalent and vulnerable investment frauds that people fall prey to.
1. Online Investment Frauds
With the Internet becoming an effective and efficient research tool, investors are using it to verify the credibility of many investment opportunities. Many a time, the Internet becomes the primary source for dubious investment schemes and the platform to promote investment frauds.
Internet fraudsters often use pump-and-dump schemes to trick gullible audience. These schemes provide false information with the help of emails, pop-up websites, and other community engagement platforms, to artificially inflate stock prices. When the price reaches a certain level, the fraudster dumps their stock holdings in the market to obtain profits. The entire scheme unfolds in very short time, and before the other buyers come to their senses, the stock prices drop to the original level.
Internet scammers use advanced digital tools to avoid typographical errors when designing fraudulent websites that seem extremely reliable. In order to identify fraud websites, you need to pay attention to typographical errors, website design, and even poor graphics. These may help you check the legitimacy of a website.
One of the leading investment and stock fraud attorneys in San Diego suggests that consumers should check financial statements, authenticate the claims of new products, and verify the background of the broker before investing.
2. Investment Ponzi Scheme
The Ponzi scheme is a financial term used to define an investment fraud that involves the payment of alleged returns to existing investors from funds contributed by new investors. Organizers market the fraud scheme to new investors and lure them by promising high returns upon investing funds in opportunities with little or no risk.
These opportunities generally involve unregistered investments, and require a consistent flow of money from the investors. The entire scam comes to a standstill, and is at a greater risk of getting exposed, when the organizers can no longer recruit new investors or when a multitude of investors want to cash out at the same time.
Authentic investment values tend to fluctuate depending on stock market trends, even more so for schemes that claim to offer high returns. Be cautious of any investment that continues to provide regular, positive returns even in bad market conditions.
If you suspect that an individual or a firm is trying to entrap you into such a scheme, start by asking questions about the offer and gather as much information as you can. Check if the investment is registered and number of investors already on board. You can get the scheme verified by the Securities and Exchange Commission’s database and even seek help from your state’s Securities Regulator for details about the scheme.
3. Forex Scam/Foreign Exchange Fraud
In earlier times, the foreign exchange was infamous for scams and illicit trading. Because of loopholes in auditing and weak checking systems, it was easier for the traders and brokers to indulge in unscrupulous activities. Gradually, the forex market is becoming more regulated and transparent. However, there are still many brokers who are violating the law to earn profits.
For investment in the forex market, be extra cautious when dealing with individuals/companies who operate from a different country. Do thorough online search for reviews on multiple brokers. Also, find out if there are outstanding legal actions against the broker.
If your broker isn’t prompt with email responses or provides vague answers to your queries about the money that you invested, then you should treat these as red flags, as your broker may not be acting in your best interest.
Read all the information carefully, including the details mentioned in fine print, before authorizing your broker to open a trading account. You may be offered incentives to open the account with the broker, but remember that these offers can be used against you in certain situations.
If you are satisfied with your research on a particular broker, you can start investing smaller amounts of capital using a mini account and attempt a withdrawal on a monthly basis. Once you completely trust your broker with the capital, you can start depositing more funds in that account.
With stricter investment fraud laws in place, even fraud promoters have started to up their game and make their schemes appear genuine. These investment schemes are often quite similar to the legitimate ones, giving the investors a false sense of security. If you are planning to invest, you should never go all in with your capital, even if you think that your broker has your best interests in mind. Consult legal and financial experts for guidance, so that they can forewarn you about the risks of deceiving investment schemes.