Tuesday, November 13, 2012, AM | Leave Comment
Investment scams can take many forms and fraudsters can turn on a dime when it comes to developing new pitches for the latest fraud. The very basic definition of fraud is that it’s a discipline of deception. But while the scam hook might change, the most common securities frauds tend to fall into the following general schemes:
In these schemes, 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.
These are 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. Bernie Madoff was the master of Ponzi schemes.
Here 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.
A few years ago, I personally lost over $27,000. The newsletter spelled out sure shot of a stock that it would rise to epic proportion the likes of which had never been seen before. It was too good to be true and it certainly was but I fell for it head down.
Advance Fee Fraud
This kind of fraud plays on investors’ hope that they 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.
These scams 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 Regulation 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.