Types of Investment Fraud
Investment fraud generally refers to a wide range of deceptive practices that scammers use to induce investors to make investing decisions. These practices can include untrue or misleading information or fictitious opportunities. Investment fraud may involve stocks, bonds, notes, commodities, currency or even real estate. The scams can take many forms—and fraudsters can turn on a dime when it comes to developing new pitches or come-ons for the latest fraud. But while the hook might change, the most common frauds tend to fall into the following general schemes:
Pyramid Schemes: A pyramid scheme is when fraudsters claim that they can turn a small investment into large profits within a short period of time. But in reality, participants make money by getting new participants into the program. The fraudsters behind these schemes typically go to great lengths to make their programs appear to be legitimate multi-level marketing schemes. Pyramid schemes eventually fall apart when it becomes impossible to recruit new participants, which can happen quickly.
Ponzi Schemes: This is when a fraudster or "hub" collects money from new investors and uses it to pay purported returns to earlier-stage investors, rather than investing or managing the money as promised. The scheme is named after Charles Ponzi, a 1920s-era con criminal who persuaded thousands to invest in a complex scheme involving postage stamps. Like pyramid schemes, Ponzi schemes require a steady stream of incoming cash to stay afloat. But unlike pyramid schemes, investors in a Ponzi scheme typically do not have to recruit new investors to earn a share of "profits." Ponzi schemes tend to collapse when the fraudster at the hub can no longer attract new investors or when too many investors attempt to get their money out – for example, during turbulent economic times.
Pump-and-Dump: This is a scheme in which a fraudster deliberately buys shares of a very low-priced stock of a small, thinly traded company and then spreads false information to drum up interest in the stock and increase its stock price. Believing they're getting a good deal on a promising stock, investors create buying demand at increasingly higher prices. The fraudster then dumps their shares at the high price and vanishes, leaving many people caught with worthless shares of stock. Pump-and-dumps traditionally were carried out by cold callers operating out of boiler rooms, or through fax or online newsletters. Now, the most common vehicles are spam emails or text messages.
Advance Fee Fraud: This type of fraud plays on an investor's hope that he or she will be able to reverse a previous investment mistake involving the purchase of a low-priced stock. The scam generally begins with an offer to pay you an enticingly high price for worthless stock. To take the deal, you must send a fee in advance to pay for the service. But if you do so, you never see that money—or any of the money from the deal—again.
Offshore Scams: These come from another country and target U.S. investors. Offshore scams can take a variety of forms, including those listed above. Many involve "Regulation S," a rule that exempts U.S. companies from registering securities with the Securities and Exchange Commission (SEC) that are sold exclusively outside the U.S. to foreign or "offshore" investors. Fraudsters can manipulate these types of offerings by reselling Reg S stock to U.S. investors in violation of the rule. Whatever form an offshore scam takes, it can be difficult for U.S. law enforcement agencies to investigate fraud to rectify harm to investors when the fraudsters act from outside the U.S.
Identity Theft: Identity theft is a crime that involves the illegal access and use of an individual's personal and/or financial information. Identity theft can result in financial loss and seriously damage a victim's credit history, requiring substantial effort to repair. Identity theft often sets in motion--or makes a victim more vulnerable to--other types of financial fraud. Identity theft may be committed against anyone whose personally identifiable information (name, Social Security number, credit card number, date of birth, etc.) is exposed. It's important to take steps to minimize your risk of identity theft.
Mortgage and Lending Fraud: Traditional mortgage fraud includes situations in which homebuyers and/or lenders falsify information to obtain a home loan. False information can include overvalued appraisals, guarantees of low interest rates, inflated income, and the fraudulent use of someone's name without the knowledge of that individual. This fraudulent activity can also include loan modification, foreclosure prevention, and other lending fraud, for example, in which a consumer is promised a service related to a mortgage (whether new or refinanced) in exchange for an up-front fee. Unfortunately, many of these loan modification and foreclosure prevention fraudsters take the pre-paid money and disappear before providing any services to the victim.
These scams use a variety of simple tactics to identify their financially distressed victims. Some scammers locate distressed borrowers from published foreclosure notices or other publicly-available sources. Others rely on mass-marketing techniques such as flyers, radio, television and Internet advertising to lure in distressed borrowers. Still others deceptively suggest an affiliation with a government agency to quickly earn the trust of unwitting victims.
Mass Marketing and Other Fraud: Mass marketing fraud is the use of false promises of cash prizes, services, goods, or good works in exchange for fees, donations, or purchases. This crime may be committed through the mail, telephone, email, television ads or infomercials, or any other form of mass or individual communication. This fraud is often defined by the form of communication used to conduct it. Mail and wire fraud occur when the U.S. mail or a wiring service, respectively, are used to further a fraud scheme—whether it originated in person, through the mail, by telephone, or over the Internet. In many cases, these violations are associated with other areas of fraud. For instance, a Ponzi scheme investment opportunity may be marketed through the U.S. mail with "investment" payments made through a wire service.
Most of the schemes—such as fake check, foreign lottery or mystery shopper scams—are perpetrated through an advance-fee scenario; the targeted consumer is enticed to send money first in anticipation of a much greater reward, opportunity, or return that is never realized.