How to Avoid Fraud
The last place you want your savings to end up is in the hands of a fraudster. Understanding how investment scams work is an important step in avoiding fraud and protecting your hard-earned money.
Common Types of Fraud
Military personnel may be at heightened risk for affinity fraud. Affinity frauds target members of identifiable groups through exploiting the trust and friendship that exist in a group of people who have something in common. In the case of military personnel and veterans, the strong bonds and feelings of trust they have for those who have served in the same units, branch of service, military occupation, or theater of combat can make them susceptible to fraud by someone claiming to be a member of such a group. Sometimes the fraudsters are in fact members of that group. In other instances, the fraudster may only pretend to be affiliated with the group.
Fraudsters may convince unsuspecting group leaders to promote the scheme. Fraudsters may also use social media to promote an affinity fraud and encourage group members to use social media to share information about a so-called investment opportunity with others. Victims may hesitate to notify authorities or pursue legal remedies.
“Ponzi” and Pyramid Schemes
Many affinity frauds are Ponzi or pyramid schemes. In a Ponzi scheme, money from new investors is used to pay “returns” to existing investors. In a pyramid scheme, new participants’ fees are used to pay recruiting “commissions” to existing participants. In both types of schemes, when new investors stop coming in, the scheme collapses and investors lose their money.
Fraudsters may promote a stock to create a buying frenzy that will pump up the share price so that they can sell their shares at investors’ expense. Fraudsters may promote the stock through seemingly unbiased sources including social media, investment newsletters, investment research websites, online advertisements and newsletters, email, direct mail, newspapers, magazines, television, and radio.
Warnings of Potential Fraud
Investment scams tend to share some common characteristics. Watch out for red flags of fraud:
- “Guaranteed returns” aren’t. If someone promises you a guaranteed high rate of return on your investment, it likely is a fraudulent investment scheme.
- If it sounds too good to be true, it is. Every investment carries some degree of risk. Low risk generally means low yields, and high yields typically involve high risk.
- Unsolicited offers, including through social media. A new post on your wall, a tweet mentioning you, a direct message, an e-mail, a text, a phone call, or any other unsolicited communication regarding an investment “opportunity” may be part of a scam.
- Beauty isn’t everything. Don’t be fooled by a sophisticated looking website or documents.
- Lack of documentation. Be skeptical of investments without documentation reflecting the promoter’s claims. If there’s nothing in writing, walk away.
How Can I Avoid Being Scammed?
Check Out the Financial Professional
Unlicensed, unregistered persons commit many of the securities frauds that target retail investors. Even if a close friend or family member or a group of friends recommends a financial professional, or the financial professional claims to have impressive credentials, you should still check out that person for signs of potential problems before becoming a customer. Working with a financial professional who is registered or licensed with federal or state securities regulators affords you certain legal protections. Investor.gov has a free and simple search tool that allows you to find out if your investment professional is licensed and registered, and if he or she has a disciplinary history or customer complaints.
Ask Questions and Check out the Answers
Fraudsters rely on the fact that many people simply don’t bother to investigate before they invest. Do your own research, and understand the investment and its risks. Carefully review all of the materials available to you and, if possible, verify what you are told about the investment. Never make an investment decision based on just one source.
Research Before you Invest
Just because someone you know made money, or claims to have made money, doesn’t mean you will too. Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration provides investors with access to key information about the terms of a product being offered or of a company’s management, products, services, and finances. You can check whether an issuer has registered its securities offering with the SEC by using the SEC’s EDGAR database online or call the SEC’s toll-free investor assistance line at (800) 732-0330 (or 1-202-551-6551 from outside of the U.S.). Investor.gov also has a vast library of educational resources on investing, different investment products and how the market works.
Beware of Persuasion Tactics
Fraudsters may use persuasion tactics including phantom riches (dangling the prospect of wealth, enticing you with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor), and scarcity (creating a false sense of urgency by claiming limited supply).
Take Your Time—Don’t Be Rushed Into Investment Decisions
Fraudsters may tell their victims that this is a once-in-a-lifetime offer, and it will be gone tomorrow. But resist the pressure to invest quickly, and take the time you need to investigate before sending your money.
Be Cautious with Offshore Investments
When you send your money abroad, and something goes wrong, it may be more difficult to find out what happened and to locate your money.
Don’t Lose Sight of Your Investments
Monitor the activity in your account and request regular statements. Get access to your account online, if available. That way you can check on your money frequently from anywhere in the world you have internet access. Ask about any trading activity that you don’t understand. Remember—it’s your money.
Question Why You Cannot Cash Out Your Principal Or Profits
Fraudsters may use delay tactics when you request your principal or profits. Don’t be fooled by explanations as to why you can’t get your money back or by suggestions that you roll over your “profits” into other investments.
If you suspect possible securities fraud, report it to the SEC by submitting a complaint on SEC.gov. If you have a problem concerning your investments, your investment account or a financial professional, call the SEC’s toll-free investor assistance line at (800) 732-0330 (or 1-202-551-6551 from outside of the U.S.).
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
Modified: April 6, 2023