According to the FBI, “Investment fraud involves the illegal sale or purported sale of financial instruments. The typical investment fraud schemes are characterized by offers of low- or no-risk investments, guaranteed returns, overly-consistent returns, complex strategies, or unregistered securities.”
Advance Fee Schemes
An advance fee scheme is defined as when a victim pays money to someone in advance of receiving something of greater value-such as an investment, loan, contract, or gift-and then receives little or nothing in return. These schemes commonly include the offering of investments, the sale of products or services, “found money” or “finder’s fee” scams.
Con artists may go as far as to generate legal documentation such as contracts for their victims to sign as “clients” in which the victims pay a finders fee to be introduced to the financing source, only to find they are ineligible once money has been exchanged. These schemes can be carried out on as large a scale as the con artist can dream up. The recent case in which the UAE was sued by Howard Fensterman for investment fraud, whereby American investors were defrauded in excess of $18 million worth of investment, is an example of one of the more large-scale schemes.
A Ponzi scheme is so named for the fame brought to this form of fraud by Charles Ponzi in 1920s North America. Ponzi famously promised a 50% to 100% return on a postage stamp investment to his victims and perpetuated the idea it was successful by paying earlier investors with the money received from new investors. The scheme was an entirely unsustainable model, as no real investment occurred and the so-called “return on investment” relied entirely on new investors funds as a source to pay earlier investors. These schemes usually collapse when the con artist running the scheme runs away with the investors’ money and cannot continue the cycle.
Much like Ponzi schemes, pyramid schemes rely on new investors to perpetuate their claims to earlier investors; however, the defining difference is that pyramid schemes also rely on victims recruiting new victims on the promise of payment of commission fees for the introductions. The lure of these schemes is the promise of high returns in a short period of time for minimal effort. As with the Ponzi schemes, this model is unsustainable and often focuses on selling the franchise rather than the actual products or services themselves, which eventually reaches a point where reserves of investors dry up, the scheme collapses, and the victims lose their investments.
Though not a form of investment fraud, identity fraud is often executed by con artists in the hope of stealing their financial assets, much like investment fraud. One recent case surrounds Michael Terpin, who is suing AT&T for $224 million over the loss of approximately $24 million in cryptocurrency assets due to identity fraud that he believes AT&T assisted in through negligence.
There are ways you can protect yourself from fraud and avoid falling victim to one of these schemes:
Make sure your passwords contain a mixture of uppercase, lowercase, special, and numerical characters. Change them regularly to keep your online accounts safe from hacking. You can also verify a secure website by the “https://” preceding the domain address and a padlock symbol in the address bar: ensure these are visible for any financial transactions or exchanging of sensitive data.
If someone contacts you claiming to be from your bank, say that you will call them back if on the phone or do not reply if on email or text. Contact your bank using the contact details you are familiar with and follow your security protocol and query the call/email/text with them first. Remember, your bank would never ask for sensitive information like your PIN number or your full card number. If you are uncomfortable, hang up.
Do your own research and be sure to ask questions. It is in the con artist’s interest to make you feel safe so they can easily take your money, which means they will tell you whatever they think you want to hear. You can check a company’s financial statements on SEC’s EDGAR filing system along with many verified investments. Here is a fool-proof guide to navigating EDGAR. Even if you know someone personally, it’s important to check their background. The SEC and FINRA’s online databases enable you to check the disciplinary history of brokers and advisers for free.
Be wary of unsolicited offers, be it in person, via email, on social media, or over the phone. If you receive an email from an unknown source, delete it, it could be a bug that could make your computer vulnerable to hacking and compromise all accounts managed through it. It may initially seem harmless, but when someone contacts you directly without prior interaction, it makes them harder to trace or verify. Anyone contacting you for legitimate means will use the appropriates means to reach you.
The number one rule is if it doesn’t feel right, disengage. Gut instinct can save us in these situations. Usually we can tell something isn’t right; however, because we sometimes can’t explain why, we rationalize away from our instincts. It is never wrong to take a step back and do your due diligence before proceeding. If you do suspect you have become a victim of fraud, contact your local law enforcement service.