If It Feels Like a Fraud & Talks Like a Fraud, Chances Are…


It’s a fraud. They come in every type and variety, from pyramids to Ponzis. Anyone can fall victim, too, from first-time investors to seasoned pros. Here are several prominent frauds out there and what you can do to avoid them.

The Pyramid Scheme

The classic “pyramid” scheme works by participants making (or attempting to make) money by recruiting new participants, in exchange for claims of sky-high returns in “no time at all!” Pyramid promoters try to make their schemes look like multi-level marketing programs selling legit products and services. But really, they’re just paying themselves or paying off early stage investors until eventually, the entire pyramid falls.

The Ponzi Scheme

This investment fraud promises high returns with little or no risk. But in most Ponzi schemes, the fraudsters never actually invest any money. Instead, they use new money to pay off early investors and keep the rest for themselves. Ponzis require a constant flow of new capital to survive. When a large number of investors cash out at once, the Ponzi scheme collapses.

“Prime Bank” Investments

If someone tells you about this awesome investment called a “prime bank” program or “prime World Bank” instrument – or a similarly high-yield security – walk away. Better yet, run away.

Promoters use the power of language to make their schemes sound legit, relying on jargon like ‘debentures’ and ‘standby letters of credit’ and ‘offshore trading programs’ in tandem with big-name organizations like the World Bank, International Monetary Fund, the U.S. Federal Reserve. They talk a good game, but if you don’t know what game they’re talking about exactly…fugetaboutit.

Promissory Notes

Promissory notes are a form of debt that companies sometimes use to raise money. They typically involve investors loaning money to the company in exchange for fixed periodic income. Promissory notes are often legit, but sometimes fraudsters use them to rip people off, especially the elderly.

Pump and Dump Schemes

First, promoters try to boost the price of a stock with false or misleading statements about a company. Then, once the stock price has been “pumped” they “dump” their own holdings. Promoters often claim to have the “inside” scoop on the stock or company, but it’s all hype. Hype invented for them to make a buck and for you to lose way more than your fair share.

Advance Fee Fraud

Advance fee frauds ask for payment up front before a deal can go through. The so-called Nigerian advance fee fraud is the most famous example of this, wherein someone pretending to be a Nigerian official or businessperson promises high profits for help moving money out of Nigeria.

Affinity Fraud

Affinity fraud targets members of identity-oriented groups, usually of the same religious or ethnic community. Promoters of these scams exploit the trust and friendship within that group by enlisting trusted leaders to “spread the word” about a so-called investment opportunity. Often, victims try to work things out among themselves instead of notifying authorities.

How do you protect yourself from getting scammed, hoodwinked or worse?

1. Ask questions! Fraudsters are counting on you not to investigate before you invest. Always do your own digging instead of relying on “facts,” “figures” and “references” they provide. Look for the company’s financial statements on the U.S. Securities and Exchange Commission’s (SEC) website, or contact your state securities regulator.

2. Fact-check the salesperson. Even if you already know the person you’re thinking of investing with socially, make sure he or she is licensed to sell securities in your state. You can also check out their disciplinary history for free using databases available on the SEC’s and Financial Industry Regulatory Authority’s (FINRA) websites.

3. Steer clear of unsolicited offers. If you read lots of praise about a company or investment online but can’t find any current financial information about it from independent sources, it could be a “pump and dump” scheme. Be equally wary of foreign and “off-shore” investments.

You’re a successful and financially intelligent person…

So you’d never fall victim to fraud, right? Wrong. Investment fraudsters target their marks with persuasion techniques specifically tailored to your psychological profile – whatever that might be.

Always remember:

  1. If it sounds too good to be true, it is.
  2. “Phantom riches” are riches are like Santa Claus and his elves. They don’t exist!
  3. There’s no such thing as a “guaranteed return” on an investment.
  4. Beware the “halo” effect. Credibility can be faked.

The bottom line is don’t be blinded by niceties or your own desire for riches. If you’re patient and vigilant about your long-term financial interests, real wealth will come.