According to the Federal Bureau of Investigation, investment fraud entails the purported or illegal sale of financial devices. Though this type of fraud may occur in multiple ways, some schemes are more common than others. Those include pyramid schemes, Ponzi schemes, advance fee fraud and market manipulation fraud. Before making their next move, Florida investors should familiarize themselves with investment fraud tactics and know the warning signs.
Investment fraud schemes often seek to target affinity groups — or individuals with a common background — and use members’ common interests to build the trust necessary to operate a large-scale fraud. Perpetrators often include individuals whom one would least expect, such as trusted professionals, friendly neighbors and over-enthusiastic sports coaches.
Because fraudsters often hide in sheep’s clothing, financially intelligent people fall victim to investment fraud every day. The U.S. Securities and Exchange Commission explains that this is because fraudsters use an arsenal of persuasion techniques, each of which they tailor to individual victim’s psychological profiles. How can a person sift through the glitter, then, to identify fraud? The government website also explains investment fraud red flags.
The most obvious sign that an investment opportunity is a fraudulent one is the fact that it is too good to be true. The FEC warns investors against “phantom riches” and claims of “incredible gains” and “huge upside and almost no risk!” It also warns investors to steer clear or any opportunities that claim investors will receive a substantial return or worse, that promise guaranteed returns. Promises of high and guaranteed returns are the hallmark signs of extreme risk or downright fraud.
The pressure to send money right away is another red flag of investment fraud. Scam artists often use the “one in a lifetime opportunity” pitch to snag people.
Another red flag of fraud is the “halo” effect. Con artists often integrate into communities and become trustworthy members or even leaders. If a highly likable member of a community begins to push a product, the FEC encourages interested investors to do their homework, as it is not difficult for fraudsters to feign credibility. Investors should also be wary of sales presentations that focus less on the product and more on how many others bought the product.
Finally, the FEC says to be aware of reciprocity. It is not uncommon for scam artists to offer potential investors a free lunch, mini-vacation or a free trial package in exchange for participation. Following a free event, investors should always take the material home and do extensive research before committing.