Red Flags of Investment Fraud

This week, I taught my Rutgers students about investment frauds like Pyramid and Ponzi schemes. 

Each year, thousands of consumers lose billions of dollars to fraud. Con artists use chat rooms and social media to post “urgent” messages telling people to buy a particular stock. They also use telephones to take advantage of unsuspecting victims. The movies Boiler Room and The Wolf of Wall Street provide valuable insights into how unscrupulous operators steal victims’ money by peddling worthless or nonexistent securities. 

So how do you know if an investment is fraudulent? Below are five “red flags”:

¨      Future Predictions- Beware of marketers that guarantee an investment’s future return. With the exception of bonds, investment returns are unpredictable and the value of securities rises and falls with market trends.

¨      Quick Cash- Scam artists often promise fast, low-risk payoffs and compare their returns to low rates available on bank accounts or bonds. Their implication is that victims are “suckers” for settling for low returns and that they have a sure path to high returns in a short period of time.

¨      Obscure Origins- Background information about the origin and performance of fraudulent investments is misleading or not provided because marketers do not want consumers to be able to check out their claims.

¨      Immediate Response- Requiring an immediate response and deposit of funds is another hallmark of investment fraud. Urgency is important to swindlers so they get victims’ money fast before victims have time to become suspicious or contact others for advice.

¨      Recovery Attempts- Fraud victims’ names are widely circulated. If you have fallen prey to a previous scam, you could get a call promising to recover money that you have already lost. Of course, this “service” comes at a price. Be suspicious if people call and already know where you have invested before.