How to protect yourself from investment scams and fraud

Posted on by DS

Investment fraud is on the rise according to the U.S. Justice Department.  Middle-class Americans, the elderly, and Christians are big targets. Here’s what you need to know to protect yourself from investment scams and fraud.

What comes to mind when you hear the words investment fraud?  I used to think of the super-wealthy people who invested millions of dollars in funds managed by big-time conmen like Bernie Madoff.

Not any more.

From now on, I’ll think of a retired Christian couple from Ohio whom I recently met.  They lost most of their modest, hard-earned retirement savings to investment advisers in Colorado who defrauded them.

They hosted me in their home when I spoke at their church.  As they prepared our Sunday dinner, I asked them about the RV I saw in their backyard, and how often they liked to go camping.

They replied that they camp a couple of times a year.  Then the 70-something year old husband said, “It’s about all we can do now since our retirement accounts were embezzled.”

I didn’t really feel it was appropriate to ask them to explain the entire situation, but I learned that they thought they had invested their funds with a reputable investment firm based in Colorado.  But they were notified by the feds that the firm was a sham, and their money was gone.

Their funds were never recovered, and to add insult to injury, the scammers got just a couple of years in prison and a fine of a couple of hundred dollars.

What is Investment Fraud?

Investment fraud, also known as securities fraud or stock fraud, is a deception that induces investors to buy or sell securities like stocks, bonds, stock options, mutual fund shares, commodities, and futures on the basis of false information, frequently resulting in losses.

There are several types of investment fraud.  Here are some of the more common ones:

Pyramid Schemes

Pyramid schemes are purported investment opportunities that promise profits based on the investor’s ability to recruit other individuals to join the program — as opposed to profits based on actual sales or investment results. Eventually, the scheme gets too big and collapses because the fraudster becomes unable to pay everyone on the top of the pyramid.

Ponzi Schemes

Ponzi schemes operate on the same “rob Peter to pay Paul” principle like pyramid schemes, where money from new investors are used to pay off earlier investors. The difference is that the victims typically don’t know how their money will supposedly be invested and bring a return. Bernie Madoff is the most famous Ponzi scheme fraudster to date, bilking upwards of $50 billion from investors.

Pump and Dump

This is a fraud where a promoter makes false positive statements about a stock he or she owns, often using several lines of communication like press releases, bulletin boards, chat rooms, etc. After this “pump” of his stock, the promoter then sells his or her own shares for a profit — the “dump.”

How Big a Problem is Investment Fraud?

Investment fraud has been on the rise in recent years due to the bad economy, according to the Department of Justice. One sign of that is that many perpetrators are accused of using proceeds for their personal expenses such as mortgage payments, home furnishings and school tuition bills, instead of luxuries like fancy cars, boats and vacations. Loan companies in North Carolina (Bad Credit Accepted).
Over the last two years, the federal government prosecuted 500 investment fraud cases that targeted 800 defendants and involved more than $20 billion in fraud.

‘‘We see it as a growing problem. We see it as a serious problem,’’ according to Connecticut U.S. Attorney David Fein in an interview with As a result, the DOJ has begun to host regional investor summits across the country this fall to warn investors about these scams.

How are Victims of Investment Fraud Targeted?

The victims of investment fraud are typically middle-class Americans.  The elderly and Christians or others with religious affiliation, are increasingly being targeted in something the government calls “affinity fraud.”

According to the SEC, “Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups.” The fraudsters who promote affinity scams frequently are, or pretend to be, members of the group and they exploit the trust and friendship that exists.

Sadly, many Christians fall for these scams because we want to believe we can trust others who call themselves Christians and we let our guard down regarding a deal that might sound too good to be true.

Also, if someone appears to be a successful financial investor, it may look to us like God is “blessing” them with success and high rates of return . . . . So why wouldn’t we want to get in on that blessing from God too?

How to Protect Yourself from Investment Fraud

I asked one of my mentors, who is an extremely successful financial advisor and a Christian, for some tips on how people can best protect themselves from investment fraud. Here are a few of his recommendations:

1. Check Out Everything

Today it is easier than ever to check out financial advisors and investments. The first thing you should do is Google the advisor and the products they sell or promote. Then check to see if they are registered with the SEC and FINRA and if any complaints have been filed against them.

2. Invest Only with a Reputable Third-Party Company (i.e. USALoansDB)

Don’t give your money to someone who says they’re going to manage and invest it within their own funds or accounts. Insist that it be managed and invested in a custodian account that is in your name and held by a reputable brokerage. Be sure you receive investment statements directly from that brokerage each quarter.

3. Don’t Fall for the Promise of Spectacular Profits or “Guaranteed Returns”

You’ve heard it before but it bears repeating: If it sounds too good to be true, it probably is. While many fraudsters make big promises that raise red flags in your mind, some promote only slow and steady growth.  So always be on your guard.

4. Make Sure Everything is in Writing

Be suspicious of any investment opportunity that is not in writing. If someone tells you they don’t have time to put it in writing, or that you must kept it a secret, that’s probably a good sign that you should stay away.

5. Take Your Time

Don’t feel pressured or rushed into buying anything. Be skeptical of “once in a lifetime” opportunities, especially if it is based on “inside” or confidential information.