What Is Investment Fraud?

Investment fraud is when someone lies or deceives others to get them to invest money in something that’s not real or not what they say it is. It can take many forms and anyone can become a target.

Pig-butchering, for example, is a type of investment fraud and brings in new victims with the promise of romance or friendship. It’s a Tether scheme widely covered by Zeke Faux and recently featured on Last Week Tonight with John Oliver.

As pig-butchering is just one type of investment fraud, it’s important to understand common traits of investment fraud. Below are some common warning signs and situations when you’ll want to be extra careful.

Common Warning Signs

Investment fraud is can have devastating consequences. If you know what to look out for, you can help keep yourself or someone you care about safe from falling for investment fraud.

Common warning signs include:

Unrealistic Returns: Be careful with offers that seem too good to be true. Bernard Madoff offered unrealistic returns and it’s alleged that Alex Mashinsky did too.

Pressure to Invest Quickly: Scammers often use high-pressure tactics to push investors into making hasty decisions without sufficient time to conduct research or seek advice from financial professionals.

Guaranteed Returns: As with unrealistic returns, be careful of investment opportunities that guarantee returns. This goes double if advertised as “risk-free.” All investments have some risk, and no real investment can guarantee returns.

Lack of Documentation: Legitimate investment opportunities provide clear and comprehensive documentation. Be wary of investments that lack transparency or refuse to provide documentation.

Complexity: It’s a good idea to avoid investments that are overly complex or difficult to understand. Fans of Warren Buffet will recognize this as one of his rule of investing. Scammers often use complicated investment structures to confuse investors and conceal fraudulent activity.

Unregistered Investments: Before investing, verify that the investment opportunity and the individuals offering it are properly registered with the appropriate regulatory authorities. Unregistered investments are often associated with fraudulent schemes.

Unlicensed Sellers: People who work in investments, like brokers and advisors, need to have a special license and be approved by government agencies. Don’t give your money to anyone who doesn’t have the right licenses or approval.

Exclusive Offers: Fraudsters may use FOMO to attract new victims. Legitimate investment opportunities are usually open to all qualified investors.

Difficulty Withdrawing Funds: Delays or difficulty when trying to withdraw funds from your investment could be a sign of fraudulent activity. You’ve seen this show before, think FTX and Celsius.

Affinity Fraud: Scammers exploit trust and relationships in an affinity fraud. Be careful around investment opportunities shared by social networks, IRL social groups, or personal connections. Pig-butchering is an example of an affinity fraud.

Vulnerable Times

In addition to knowing the common features of investment fraud, it can be helpful to know what circumstances or conditions can make us vulnerable to deceptive tactics. Some common situations when individuals are at higher risk of falling for investment fraud include:

Economic Downturns: During times of economic uncertainty or financial distress, individuals may be more susceptible to investment fraud. Scammers may prey on fears of financial instability and promise high returns to lure desperate or vulnerable investors.

Following Big News Events: Big news events can create uncertainty. Scammers may exploit this feeling to promote fraudulent investment opportunities that promise safety or high returns.

Market Booms: When the market is doing really well, and people are excited and buying lots of stocks (or crypto), they might be more likely to fall for scams that promise to make them rich fast.

Seeking Alternative Investments: Investors looking for alternative investment opportunities may be more vulnerable to fraud. Scammers often target individuals seeking higher yields or diversification by promoting exotic or unconventional investment products with inflated promises of returns.

Facing Financial Pressure: Individuals experiencing financial hardship, debt, or other financial pressures may be more susceptible to investment fraud. Scammers often target financially insecure individuals with offers that sound too good to be true.

Lack of Financial Literacy: People with limited knowledge of investing and finance may be more susceptible to investment fraud. Scammers might use fancy words, confusing language, or tricky tricks to trick people who don’t know much about money into giving them their money.

Emotional Pain: Feeling sad, alone, or worried can make it hard to think clearly and make good choices. People who feel this way might be more likely to fall for investment scams. Scammers may exploit emotional vulnerabilities. Grandkid and family scams demonstrate this.

By recognizing these risk factors and exercising caution, skepticism, and due diligence, individuals can better protect themselves from falling victim to investment fraud. Do your own research, no really. If you don’t understand something, speak up. If you want to see documentation, ask for it. Ask for credentials. Ask for references. If you need more time, take it.

It’s important to research investments carefully, get advice from trusted financial professionals, and lookout for warning signs of fraudulent activity. If you suspect investment fraud or have concerns about a potential scam, report it to the appropriate authorities immediately.

If you’re concerned about a loved one or child, check out our guide to problematic crypto trading!

As a reminder, this is intended for information purposes only and is not legal or financial advice.

If this is an emergency, dial 911.

Categories: For Investors