Before emptying your pocket, understand these scams
Thu May 14, 2009, 6:52 am | Leave Comment
Investment scams can take many forms and fraudsters – a fraud is a discipline of deception – can turn on a dime when it comes to developing new pitches for the latest fraud. But while the scam hook might change, the most common securities frauds tend to fall into the following general schemes:
- Pyramid Schemes – where fraudsters claim that they can turn a small investment into large profits within a short period of time – but in reality participants make money solely by recruiting new participants into the program.
- Ponzi Schemes – in which a central fraudster or “hub” collects money from new investors and uses it to pay purported returns to earlier-stage investors – rather than investing or managing the money as promised. Read Who is at fault – Madoff, SEC or a Third?
- Pump-and-Dump – in which a fraudster deliberately buys shares of a very low-priced stock of a small, thinly traded company and then spreads false information to drum up interest in the stock and increase its stock price.
- Advance Fee Fraud – which plays on an investor’s hope that s/he will be able to reverse a previous investment mistake involving the purchase of a low-priced stock. The scam generally begins with an offer to pay you an enticingly high price for worthless stock in your portfolio.
To take the deal, you must send a fee in advance to pay for the service. But if you do so, you never see that money – or any of the money from the deal – again.
- Offshore Scams – which come from another country and target U.S. investors. Offshore scams can take a variety of forms, including those listed above. Many involve Regulation S, a rule that exempts U.S. companies from registering securities with the Securities and Exchange Commission (SEC) that are sold exclusively outside the U.S. to foreign or “offshore” investors. Fraudsters can manipulate these types of offerings by reselling Reg S stock to U.S. investors in violation of the rule.
In a Nutshell
Before you start investing and giving out your hard-earned income, understand the different types of scams and frauds and how best to avoid them.
