FFS - Investment Fraud Lesson

Investment Fraud

On June 29, 2009, Bernard L. Madoff was sentenced to 150 years in prison. The end result, of course, is that Madoff created up to an estimated $50 billion of losses for investors — said to be the biggest fraud committed in the history of Wall Street. How did even seasoned investors manage to get ripped off by Bernie Madoff? They ignored the typical red flags that indicate Bernie Madoff's investments were a scam.

 

According to the Financial Fraud Research Center, the Fraud Enforcement Task Force uncovered $8 billion in investment fraud in 2010 alone. The Federal Trade Commission estimated that there were 48.7 million individual fraud transactions in a similar time period. That equated to 13.3% of the population being victims of fraud. According to the AARP, though 26 percent of the entire US population will be victims of investment fraud in a year, 57 percent of those people will be over the age of 50.

Types of Investment Fraud

Investment fraud comes in many forms. Let's take a look at some of the most common:

• Advanced Fee Fraud - In this type of fraud, the investment adviser demands an upfront fee before making the investment for you. While it is common practice to establish an account with an investment firm, fees are not withdrawn until transactions have taken place. Paying a fee upfront is an indicator of fraud.
• Affinity Fraud - In this scam, the scammer becomes a part of or recruits someone within a group to promote the product. Investors, particularly the elderly, tend to want to believe in someone they know. By convincing investors that others in their group are taking part in the investment, scammers take advantage of the relationship among a group or organization.
• Internet and Social Media Fraud - Scammers use websites, social media, email, and online messaging to reach the largest number of victims efficiently and quickly. They make websites and emails look as if real companies are behind them.
• Ponzi Scheme - A Ponzi scheme, sometimes called a pyramid scheme, pays older investors out of proceeds from the investment of newer investors. The problem with this is that at some point, the number of new investors will be outpaced by the number of existing investors and the funds will not be there to continue receiving profits.
• Pump and Dump - In this fraud, the scammer will start rumors about a company whose stock they would like to get rid of. The rumors are designed to drive up the price of the stock causing a buying frenzy. By the time the rumors are proved to be untrue, the scammer has sold the stock at a much higher price than they could have originally.

These serve as an overview of some of the most common scams. Many others exist. The question then, is how do we avoid being taken in by them?

Tips on Avoiding Fraud

Self-Assessment

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