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The short version:

  • There have been quite a few prominent investment scams throughout history.
  • Though not an exhaustive list, some common investment scams today include Ponzi schemes, pump & dump schemes, rug pulls, fraudulent investment seminars, and predatory lending.
  • Be wary of any sudden investment opportunities that present themselves through your email, text, or social media.
  • Always do your research on investment opportunities and safeguard yourself from potential investment scams.

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What are investment scams?

An investment scam is any sort of plot that provides false and misleading information about an investment opportunity. Examples of these can include Ponzi schemes and pump and dump schemes. More recently, crypto investors have been targeted with scams that are known as rug-pulls.

Another tactic could be to illegally front-run a stock. This means the scam artist buys shares of a stock (often thinly traded and intrinsically worthless) at a lower price, then scams others to buy the stock. As the stock price is rising, the scammer then sells the shares at a profit, which causes the stock price to drop. This is known as a pump and dump scheme.

Unfortunately, scammers sometimes target victims who they perceive to have a lack of understanding of the financial markets. Scammers usually target the most vulnerable groups of people.

More: How to find legitimate investing advice on social media

Common investment scams today

Though not an exhaustive list, below are some investment scams to watch out for.

Ponzi schemes

Ponzi schemes are defined by paying early investors with the funds of later investors. It follows the definition of “robbing Peter to pay Paul”. When these schemes inevitably fall apart, investors lose a significant portion of, if not all of their investments.

According to the website Ponzitracker, 34 Ponzi schemes were uncovered in 2021, which thankfully was a 13-year low. Still, investors should still keep up their guard as Ponzi schemes today can also involve virtual currencies.

Pump & dump schemes

This scheme is commonly carried out with stocks that have a low nominal price per share. Whether it's touting a miracle disease cure or the newest technology, scammers doing pump & dumps scam others into investing in a particular stock with the promise of very significant returns.

The scammers purposely don’t disclose to the victims that they have bought the stock long before ever touting it. And they sell the stock for a profit at the expense of the victim. The victims first see the facade of the stock price going up and then are caught off guard when the stock plummets back down.

Rug pulls

As the crypto space grows, rug pulls are becoming more prominent. These scams usually involve an initial coin offering that can be bought but cannot be sold.

The project around these coins can be completely fake and even the team behind these coins can be completely made up. Usually liquidity for a coin or token in a rug-pull is removed, making it possible for investors to buy the token, but impossible to sell.

More: How to spot a crypto scam

Predatory investment seminars

Oftentimes scammers will pose as financial planners and put together fake investment seminars to try and coerce a large group of investors into questionable investments. What they don’t reveal in these seminars are that these so-called “investments” often involve conflicts of interests, false promises, high fees and transfer penalties if you wish to stop using their services. Many of these scammers also lack proper credentials and licenses despite posing as financial planners. Some will even take the money and never be heard from again.

Predatory lending

This can be for any type of loan, but for the most part it revolves around mortgages. The scammer will push victims into signing loan agreements or mortgage agreements that are to the consumer’s detriment.

Predatory lending can be committed through false information and advertising tactics or by directly bullying the victim into signing the agreement before the victim understands the terms of the loans. These can often have stipulations like unreasonable interest rates, high late fees, or even the seizure of collateral assets.

More: Commercial vs. residential real estate investing: Which is right for you?

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Notable investment scams in history

ZZZZ Best (1986)

ZZZZ Best is an investment scam that hit the US stock market in the 1980s. The company’s founder, Barry Minkow, claimed that ZZZZ Best was the ‘General Motors of carpet cleaning’. The company went public in 1986, and the stock hit a market cap of $200 million at its peak.

Minkow spent millions of dollars and re-created over thousands of fake documents and contracts for jobs the company didn’t perform, all to keep the charade alive. When Minkow was finally caught and arrested, he was sentenced to 25 years in prison.

Enron (2001)

Enron is one of the most prominent stock market scams in history. Located in Houston, the company was at one point the seventh largest firm in the United States in terms of annual revenues.

Enron was using fraudulent accounting practices that involved shell companies which manipulated the company’s financial statements. Because of this, Enron’s revenues and profits appeared much better than they actually were. As Enron’s web unraveled, the company stock price rapidly descended. Enron eventually went out of business and no longer exists today.

Bernie Madoff (2008)

One the most infamous investment scammers of all time, Bernie Madoff swindled investors for more than $50 billion during his career. Most of his scams were done through his market-making investment firm, Bernard L. Madoff Investment Securities.

Madoff claimed that his firm would use an investment strategy to generate large and consistent returns. In reality, Madoff was paying older investors with the money from new investors; a classic example of a Ponzi scheme. Madoff was arrested in 2008 and was subsequently sentenced to 150 years in prison.

Safeguarding yourself from investing scams

One of the important parts to remember when protecting yourself from investment scams is to always carefully conduct your due diligence. It's appropriate to have a healthy amount of skepticism when evaluating new investment opportunities. Be wary of random or ‘out of the blue’ investment offers, especially if the offers are unsolicited by telephone or suddenly appear on the internet in your email inbox or social media account.

Use your common sense. And if something seems too good to be true, it probably is.

If you're presented with an investment opportunity, carefully do your research. Any financial planner you speak to should be properly licensed, as should any investment company that is providing you with a seminar or class. It may help to take a step back and evaluate whether the investment is legitimate.

Think through whether the investment opportunity makes sense. Ask yourself how the various parties in this investment opportunity are paid and where their incentives lie. Ask for legitimate references and also for additional time to consider the opportunity. It can also help to discuss with parties you trust.

Remember, it can be a red flag if whoever is offering you the investment opportunity becomes offended at the first sign of skepticism. As with all investments, do not invest more than what you can afford to lose and do not be pressured into investing more than what you’re comfortable with.

The bottom line on how to avoid investment scams

Investment scams are all around us and they typically target the most financially vulnerable members of society.  When it comes to investments, it can pay to be wary and carefully conduct due diligence on any new opportunities that are presented to you.

Further reading>>

Disclaimer: The content presented is for informational purposes only and does not constitute financial, investment, tax, legal or professional advice. If any securities were mentioned in the content, the author may hold positions in the mentioned securities. The content is provided “as is” without any representations or warranties, express or implied.

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About the Author

Jay Wu, CFA

Jay Wu, CFA

Freelance Contributor

Jay Wu is a freelance contributor for Moneywise.

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