Investment Scams 101: How Scammers Operate & What You Can Do

Investment scams can be sneaky, appearing to be legitimate opportunities promising high returns. At the core, these scams involve fraudsters trying to steal your money by convincing you to put cash into nonexistent ventures or investments.

Investments scammers operate in all areas of finance, but they tend to focus on new and innovative areas. It is easier to lure in victims in where financial instruments are less well understood. Also, where you have new and innovative financial instruments, the regulatory framework often hasn’t caught up, or there is a lack of enforcement.

Turn the clock back decades and scammers were busy pumping and dumping penny stocks, then at the turn of the millennium there was all the hype around dot com stocks, today many scammers operate online and with fake or fraudulent crypto schemes.

The Vocabulary of Scams

• Ponzi Scheme: A fraudulent investment operation where returns to earlier investors are paid using the capital from newer investors, rather than from profit earned, leading to inevitable collapse when new investments cease.
• Pyramid scheme: is a fraudulent business model where participants earn profits primarily by recruiting new members rather than by selling legitimate products or services. This structure is unsustainable, as it requires an ever-increasing number of recruits, leading to inevitable collapse and financial losses for most participants.
• Boiler Room Scheme: A high-pressure sales environment where unscrupulous brokers cold-call potential investors, promoting speculative, non-existent, or fraudulent investments, often involving “pump and dump” schemes.
• Pig Butchering: A scam where fraudsters build a relationship with the victim over time to gain trust, then lure them into investing in fake or manipulated investment platforms, ultimately stealing their funds.
• Pump and Dump: A scheme where the price of an asset is artificially inflated (“pumped”) through false or misleading statements, allowing fraudsters to sell their holdings at a profit before the price falls back down (“dump”), leaving other investors with losses.
• Rug Pull: In the crypto space, this occurs when developers of a project suddenly withdraw all funds from liquidity pools or project wallets, abandoning the project and leaving investors with worthless tokens.
• Affinity Fraud: A scam targeting specific social, cultural, or religious groups, using shared bonds to build trust and exploit victims.
• Advance-Fee Fraud: A scheme in which investors are promised a significant payoff but are required to pay an upfront fee, which they never recover.
• Offshore Investment Scam: Promises of high returns through investments in foreign or offshore markets, often involving little or no oversight.
• Churning: An unethical practice where brokers excessively trade on an investor’s account to generate commissions, regardless of the investor’s best interests.
• Binary Options Scam: Fraud involving deceptive platforms that manipulate trading software or deny withdrawals after investments are made.

and finally, to add insult to injury:

• Recovery Room Scam: Scammers approach victims of prior scams, offering to recover lost money for a fee, only to defraud them again.

Several kinds of investment scams are on the rise, including Ponzi schemes, fake initial coin offerings (ICOs), and boiler room schemes. Each scam operates differently but has a common goal: to take your hard-earned money.

Losses to Scams on the Rise

Source: Federal Trade Commission (data), Bad Investment Advice (chart)

In the United States, the Federal Trade Commission has seen a steady rise in losses from financial scams reported by consumers reaching $12.5 billion in 2024 from $3.3 billion in 2020. And these are just the reported figures. The reality is certainly much worse.

Victims underreport losses because of embarrassment, lack of awareness about reporting mechanisms, or the belief that reporting will not lead to recovery of lost funds. While precise estimates of unreported losses are unavailable, the consensus among consumer protection agencies and experts is that the true financial toll of scams is considerably higher than reported statistics indicate.

Understanding why people fall for these tricks is crucial. Scammers are skilled at playing on emotions, like fear of missing out or the allure of high returns, convincing even the savviest individuals to fall for their ploys.

Recognizing red flags early on is your best defense. Watch out for promises of guaranteed high returns with little to no risk, pressure to act quickly, and requests for personal information or payment through unconventional means. Spotting these warning signs can save you a lot of trouble down the road.

Inside the Mind of a Scammer: Techniques They Use

Scammers often use charm and psychological tricks to draw people in. They craft their pitch to make it sound like a rare opportunity, full of buzzwords and jargon that give an illusion of legitimacy. This false sense of security makes it easier for them to gain trust.

Examples of infamous scams, like Bernie Madoff’s Ponzi scheme, show how scammers can maintain their ruses for years, sometimes decades, before being caught. Stories like his highlight how even small irregularities can reveal massive frauds when scrutinized.

These perpetrators don’t fit one mold but share common traits, including a manipulative nature and a desire for quick profit without effort. Understanding what motivates them—like greed and power—can help in identifying and avoiding interactions with potential scammers.

In today’s digital era, technology has made these scams more sophisticated. Phishing emails, fake websites, and social media ads allow scammers to reach a wider audience with little effort. They hide behind anonymity, making it challenging to track their activities. Being cautious about online interactions can help mitigate these risks.

The Human Impact: Stories from Victims

Hearing directly from those who’ve been scammed sheds light on the profound impact these schemes can have. Many victims share stories of feeling embarrassed or betrayed, having trusted someone who seemed genuine. It’s common to feel a mix of anger and helplessness when realizing the loss.

The financial hit is often severe, with savings wiped out or hefty debts incurred. However, the emotional toll can be just as, if not more, devastating. Anxiety, depression, and loss of trust in others can follow, making it hard for victims to engage in financial decisions afterward.

These scams don’t just hurt individuals. Communities feel the ripple effects when residents lose their homes or reputations, or when local businesses are affected due to eroded trust. A scam’s fallout can strain community resources and destabilize local economies.

Example Victim Stories:

• A woman, expecting a child, invested her tax refund based on convincing ads, believing she could secure her and her baby’s future. When the scammers stopped responding, she disclosed her pregnancy, hoping for empathy, but ultimately lost her money.
• A young professional woman invested a few thousand dollars in an online platform promising high returns, and after seeing initial profits, she continued investing, ultimately losing $50,000.
• A religious man, after a prayer from a man who claimed to be a financial advisor, moved his IRA to him. However, the advisor was later arrested for securities fraud and running a Ponzi scheme, resulting in his victim losing his investment.
• A woman lost her life savings in a cryptocurrency investment scam after being contacted by a fraudster through a seemingly misdirected text message, who gained her trust and guided her through creating a cryptocurrency account and transferring funds.

Having a path to recovery is crucial for moving forward. Many find solace in support groups or professional counseling, which can help rebuild confidence and offer strategies for financial recovery. Empowering victims with tools and education can also prevent future scams, promoting a sense of preparedness and resilience.

Protecting Yourself and Others: Preventative Measures

Learning about scams and spreading awareness are your first steps in shielding against these threats. Sharing knowledge with family and friends can protect them too and create a more alert community.

Financial advisors play a pivotal role in safeguarding investments. Consulting one who is reputable and has your best interests at heart can provide guidance, ensuring you’re making informed financial decisions.

If you suspect you’re targeted by a scam, report it to authorities immediately. Law enforcement agencies and consumer protection groups need these reports to track trends and prevent others from falling prey.

Developing a mindset geared towards skepticism can be your strongest line of defense. Question deals that sound too good to be true, double-check unfamiliar offers, and prioritize due diligence before committing to any financial arrangement. Staying vigilant guards not just your money but also your peace of mind.

How to Report an Investment Scam

To report a financial scam, you should contact the Federal Trade Commission (FTC) or the FBI’s Internet Crime Complaint Center (IC3).

Here’s a more detailed breakdown:

1. Federal Trade Commission (FTC):

• Website: ReportFraud.ftc.gov
• Purpose: The FTC uses reports to investigate and bring cases against fraud, scams, and bad business practices.
• What to report: Scams, companies, or unwanted calls.
• Note: The FTC cannot resolve your individual report, but they share reports with law enforcement.

2. FBI’s Internet Crime Complaint Center (IC3):

• Website: IC3.gov
• Purpose: The IC3 is the FBI’s central reporting center for internet crime, including financial scams.

• What to report: Scams and fraud schemes.

Here is another article on how to spot a fake investment opportunity.

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Single-page Summary

Here is a single-page summary of Investment Scams 101: How Scammers Operate and What you can do. You can download a pdf here.

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Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as personalized investment advice, good or bad. You should check with your financial advisor before making any investment decisions to ensure they are suitable for you.

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Affiliate Disclosure: This article contains affiliate links. If you click on a link and buy something, I may receive a commission. You will pay no more so please go ahead and feel free to make a purchase. Thank you.