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Common Types of Investment Fraud and How to Spot Them

Scammers will go to extreme lengths to find lucrative illicit opportunities to defraud people. One of the avenues they often pursue is through investment fraud. Unfortunately, this form of fraud is rampant and very costly to those who suffer losses.

According to the FBI’s Internet Crime Report, investment fraud caused high financial loss for victims in 2022, costing them a whopping $3.3 billion loss – a “staggering” increase of 127% over the previous year.

To protect yourself against investment fraud it is helpful to be aware of the most common types of investment fraud and how to spot them so you don’t fall victim.

Common Types of Investment Fraud

Investment fraud comes in many forms, here we’ll share some of the most common ways bad actors pursue to rip people off.

Advance Fee Scheme

In an advance fee scheme, scammers persuade their victims to pay them money upfront to enable them to take advantage of an offer that yields greater returns. Advance fee schemers tend to target investors who have lost money in risky ventures as a “carrot” to recoup losses. They offer to buy or exchange the risky investment, but the victim must pay a fee beforehand. What happens next is the fraudster takes the money and disappears, never to be heard from again.

Financial Advisor Negligence

A licensed financial advisor (FA) is supposed to be a trusted individual. If the FA behaves unethically or illegally by inducing financial decisions based on false information or otherwise behaves in a manner that falls outside the realm of their fiduciary duties, this could constitute fraud. Unfortunately, there are fiduciaries who sometimes act in the best interests of themselves instead of their clients when it comes to profits. This is referred to as a breach of fiduciary duty.

Cryptocurrency Investment Fraud

The FBI reports cryptocurrency investment fraud rose to $2.57 billion in 2022. This fraud takes many forms but often involves scammers impersonating a business (either new or established) promoting the sale of their own crypto coins or tokens.

Cryptocurrency investment fraud can occur in many ways. For instance, an “investment manager” cold-calls you and makes promises to grow your money but only if you buy crypto and transfer it to their account through their (scam) website. Another common cryptocurrency investment fraud is when scammers pose as online love interests, gain trust, and then ask for money or crypto to help you invest and become richer.

Excessive Trading and Churning

Excessive stock trading is illegal at the federal and state levels, and unethical from a fiduciary perspective. How it occurs is an FA uses your account to make rapid, frequent trades to earn commissions without considering what’s in your best interest. This can negatively impact your ability to grow your wealth.

Churning is very similar but worse since the actions of the FA are deliberate with the intention to defraud and/or neglect their client’s interest. Reverse churning is when the FA puts their clients’ money into fee-based accounts to collect management fees without doing any actual management of their money.

Prime Bank Investments

Prime bank investments fraud involves scammers offering their victims high-yielding securities or other forms of financial investments. Promises of using the money to buy and trade Prime Bank instruments are made but, in the end, any money given is lost to the bad actors who take the cash and run.

Ponzi/Pyramid Schemes

Ponzi schemes are named for Charles Ponzi, a 1920s-era criminal who ripped off investors of about $10 million. Since that time, Ponzi/pyramid schemes have made headlines over the last several decades, especially after the nefarious deeds of the infamous Bernie Madoff after it came to light he defrauded investors of almost $65 billion.

How it works is the fraudster takes money from new investors and uses it to pay off existing investors. The scammer promises to take your money and deliver high returns with little to no risk, but they never actually invest. They just simply move money across investor accounts and filter large amounts of cash into their own accounts. At some point, they can’t keep up with investor payments, and the “bubble bursts.”

Other Common Scams

The above are only a few common investment scams. Other schemes to watch out for include:

How to Spot Investment Frauds and Schemes

The key to avoiding falling victim to a fraudster is to learn how to spot the scheme. Red flags to look for include the following:

  • Seller of the investment opportunity has a sense of urgency and wants an immediate decision
  • Seller doesn’t want to share adequate information to empower people to do research
  • Unsolicited offers (these should always be viewed with uncertainty)
  • No supplement information available for an investment opportunity
  • Little to no information on the seller’s professional background
  • Promises of high return and low risk
  • Hot investment tips/insider information is offered
  • Operations are located offshore (scammers can evade authorities)

Sellers who are pushy and vague are showing you warning signs. Don’t disregard these.

If you or someone you care about is a victim of investment fraud, The Schwartz Law Firm can help. Call us to discuss your legal rights and potential options to recover your losses. We do not collect a fee unless you recover money. To learn more, contact us today.

Matthew Schwartz

Matthew Schwartz is a Shareholder at Schwartz, P.A. where he serves as the practice group leader for their securities litigation and professional negligence practice group. His practice is focused on plaintiff-side securities arbitration and litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others. He also represents plaintiffs who have been damaged by their insurance agents, lawyers, accountants and other professionals. He is an accomplished commercial litigator who has handled a variety of business disputes and other consumer claims.

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