There will always be people who try to get you to part with your money. Scams and the artists who run them manage to find clever ways to make you believe their scam is legit. Everyone from all walks of life including well-educated people are drawn in. You only need to have heard about Bernie Madoff to understand that.
I recently attended a seminar for the NJCFE (New Jersey Coalition for Financial Education) where Christopher Gerold, Chief of the NJ Bureau of Securities, gave a quick rundown of the top 10 security frauds he sees in his office.
Top 10 Security Fraud Scams
Before I begin, let me clarify the term “security”. It refers to investments, such as stocks, bonds, and real estate.
#10 Variable annuities. These are legitimate insurance products. However, they are complex and most insurance brokers who sell them do not fully understand the product. They can be appropriate for some individuals and families. Since these are not fraudulent, before deciding to purchase a variable annuity, do your own research.
#9 Penny stocks. These are also completely legitimate. It becomes a scam when you are pressured into buying stock in a particular company. The scam artist will direct you to online postings and you will see press releases touting the company. You buy the stock along with others and price goes up. The scam artist dumps their shares at the higher price. The stock price goes down and you are stuck. This is also referred to as pump and dump.
#8 Self-directed IRA. This is used to mask fraud. But can also be legitimate. Money in self-directed IRA can be invested in alternative assets. Fraudsters will set up shell companies and get people to invest. Always check before investing in alternative assets.
#7 Proxy trading accounts. You as the account owner give the fraudster access to your account. They then trade on your account. While most victims give their IDs and passwords, they are sometimes stolen. This is another warning not to share your password and ID, especially for someone who calls or emails from what appears to be from your investment institution or bank.
#6 Unscrupulous brokers. They mostly target seniors and convince them to purchase high-commission products. In some cases, the account owners, give the broker permission to access their funds and these brokers use their customer’s funds for their own use.
#5 Pre-IPO shares. The bad actor claims they own shares of a company that an employee has sold to them prior to going public. They typically will state they own share in unicorn companies, i.e. Uber, Facebook. This is a complete scam. Employees can not trade or sell any shares of a company until the company goes public.
#4 Private offerings. Private offerings can be legitimate and can only be offered to an individual who receives $300,000 or more a year in salary or has investable assets of $1 million or more. If you are approached about a private offering, do your research carefully, before committing any money. According to Mr. Gerold, about half of the cases in his office is this type of fraud. If the returns are higher than one should expect in the market, then it’s probably not legitimate.
#3 Real estate investment scams. One recent case in NJ was referred to as Woodbridge, a $1.2 billion Ponzi scheme. Never invest in any real estate without doing proper research.
#2 Crypto-currencies. Mostly younger adults are targeted. This also includes the mining for crypto-currencies called crypto-farms. You purchase shares of computers that produce crypto-currencies. These are mostly frauds. Also, be careful about purchasing actual crypto-currencies, since they are frequently stolen.
#1 Promissory Notes. The fraudster is a CEO, Chief Executive Office, seeking funds for his company. You are offered to purchase notes with promised amount of interest and period to be repaid. These notes are not registered (which makes them illegal) and include extraordinary returns. Stay away.
Before investing, always do your research. If the return on your investment sounds too good to be true, it’s probably fraud. Stay away and choose a safe investment. You work too hard for your money to lose it to fraud.
Have you made a bad investment? Were you able to recover your money?