Putting your money in sound investments is a financially savvy thing to do. It offers the opportunity for growth and protection and allows your money to work for you. While there are lots of honest investment opportunities out there, thousands of fraudulent investments are pushed by unscrupulous brokers and malicious perpetrators.
Common Types of Investment Fraud
Investment fraud comes in a number of forms and guises. Some of the most common include:
- Ponzi schemes: The prototypical investment fraud is the Ponzi scheme. Named after Charles Ponzi, who duped thousands of people into investing in a postage stamp scheme in the 1920s, this type of fraud pays investors with funds collected from newer investors. The organizers recruit investors by claiming they will invest money into high return accounts, but instead keep the money for themselves and use the funds of new recruits to pay existing investors. Ponzi schemes are characterized by high return-no risk investments that produce strangely consistent returns from unregistered investments. They usually collapse when new investors cannot be attracted.
- Pyramid schemes: Much like Ponzi schemes, pyramid schemes make money by continually recruiting new participants. While the organization may attempt to disguise itself as a multi-level marketing program, fraudsters use new money to pay off existing investors. Pyramid schemes differ from Ponzi schemes in that they boast an actual product or service and may charge recurring member fees or payments.
- Pump and Dump schemes: Pump and dump schemes are becoming increasingly popular and refer to situations wherein promoters attempt to boost the price of a stock with false information and misleading statements. Once the price is successfully increased to the desired level, the fraudsters sell their holdings and earn a tidy profit. By dumping their shares, the stock price then drops and causes victims to lose the value of their investments.
- Advance fee fraud: Some fraudulent investments will ask investors for an upfront fee, payment, or commission for the right to invest funds at a later date. Typically, these schemes target investors with underperforming assets and offer to let them “off the hook” if they pay an advance fee.
- Microcap fraud: When dealing with microcap stocks or penny stocks, it’s important to find accurate information. Many of these companies, however, don’t file reports with the SEC. This allows fraudsters to produce false and misleading information. They usually disseminate information through email spam, paid promoters, and internet message boards.
- And more. While these are some of the most common forms, there are dozens of other scams, including affinity fraud, high yield investment programs, pre-IPO scams, promissory note scams, and “prime bank” investments.
What to do if You’ve Been Defrauded
While prevention is the best defense mechanism against investment fraud, it’s far too easy to fall into a hidden trap. When it’s too late to avoid a fraudulent investment – but you’re aware that it’s illegitimate – you can still take action. Some of the steps you’ll need to pursue include:
- Put it in writing: The first step is to put your complaint in writing with the broker, firm, or organization you believe has defrauded you. This serves two purposes: (1) your accusation will demand a response; and (2) your complaint will start a paper trail for future reference.
- Contact appropriate resources: Next, you’ll want to find the appropriate regulatory body and contact them directly. This may be the Securities and Exchange Commission, State Securities Regulator, National Association of Securities Dealers, Federal Bureau of Investigation, Better Business Bureau, local district attorney, or local Postal Inspector’s Office. These resources have the authority to conduct in-depth reviews and will accelerate the process. For best results, provide them with concrete and factual evidence of the fraudulent activity you believe has occurred.
- Find representation: At some point in the process, it will help to find some representation. Victims of investment fraud may be eligible to recover a portion of their losses through tax deductions. This could affect how you proceed. According to Section 165 of the Federal Tax Code, taxpayers are eligible for reimbursement for losses incurred in the same tax year. To investigate this possibility, you will need the services of a tax resolution specialist.
Investment fraud can be gut-wrenching and painful for victims, but the good news is that there is hope and all is not lost. Instead of lashing out and taking drastic measures, you can better address the issues by taking a calculated approach. You may even find that you’re able to recover some of your losses and regain financial peace of mind.