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Investment FraudAlthough there are many types of investment swindles, the tactics of con men don't differ from scheme to shceme. Fraud involves deceiving a person by misrepresenting the truth in order to deprive them of something. For the investor, investment fraud is all risk and no return. Government regulators have limited resources to fight financial fraud. Experts warn that no one is completely immune to the seductive pitch of the con artist who will tell potential victims exactly what they want to hear. Victims range from the rich to lower income, blue collar workers. Even if the swindlers are caught and prosecuted, the investor never gets a penny of his money back. The best protection against investment fraud is to learn how to spot and avoid the various types of scams. Con artists appeal to the greed of some victims and in other cases fears such as the inability to accumulate enough money to meet catastrophic medical bill, send children to college, or fund retirement. Keeping in mind that no group of investors is immune to con artists does the average person stand a chance with a swindler? Yes, but only if she or he allows critical thinking to guide the decision making process. When greed of fear are the deciding factors financial disaster is all too likely to follow. Major Types of Investment Fraud Investment con artists or swindlers know what it takes to get a consumer's money. Some swindlers focus on specific groups such as church groups, African Americans, Latinos, doctors or the elderly and offer pitches tailor-made to their needs and concerns. Others take advantage of economic downturns and employment uncertainty with glowing reports on the earnings of those who buy a franchise or invest in a business oppurtunity. Swindlers now can take advantage of Internet access and other technological channels to solicit fraud. It is therefore important to be familiar with the common types of investment fraud and the key warning signs for each type. there are seven main types of investment scams consumers are likely to encounter: *Pyramid Schemes *Ponzi Schemes *Precious metals fraud *Stock Swindles *Phony international investments *Affinity Fraud *Bogus franchise and business opportunities Pyramid Schemes operate on the principle that each member of a group will receive a profit or a cut for recruiting new members to join the scheme. One popular pyramid scheme is the "airplane game" in which new recruits buy in as passengers for $100 and are then told that if they bring in new investors they will be able to move up to flight crew, co-pilot and finally pilot. As pilots, they will receive $1,000 or more, In another variation on the pyramid scheme, investors buy one gold coin for $50 and are told that when they reach the top of the pyramid, they will get five gold coins a $250 value. Pyramid investment scams are different from legitimate sales organizations that recruit individuals to expand their staff. Legitimate sale firms recruit new salespeople to sell tangible products. Illegal pyramid achemes offer participants payment for recruiting new members into the sales force rather than for selling products. The problem with pyramid schemes can be explained simply: There are not enough potential participants in the whole world to keep pyramids growing steadily for even a few months. Warning signs of pyramid scam include: * Sky high profits are promised for a small amount of effort. *Sellers and buyer are expected to recruit new sellers and buyers to keep the pyramid growing. *People must pay a membership fee in order to participate in the scheme. *If products are offered they will cost more than similar products. *Unrealistic claims are made about product quality or performance. *Participants ar paid for recruiting others. Ponzi schemes are a type of pyramid scheme named for Charles Ponzi who duped thousands of New England residents into investing in a postage stamp speculation scheme. Ponzi determined that it was possible to take advantage of differnces between U.S. and foreign currencies to buy and sell international mail coupons. Ponzi told investors that he could provide a 40 percent return in just 90 days compared to 5 percent for bank savings accounts. Ponzi was deluged with funds from investors taking in $1 million during a single three hour period. Although he paid a few early investors in order to make the scheme look legitimate, an investigation found that Ponzi had purchased only about $30 worth of the international mail coupons. Ponzi worked in the 1920's,however even today Ponzi schemes continue to work on the "rob-Peter-to-pay-Paul principle; money from new investors is used to pay off earlier investors until the whole scheme collapses. Ponzi schemes often have the following characteristics: * Promises of very large returns on an investment such as "double your money 60 to 90 days". *A "can't lose" scheme for making money that others have overlooked. *Payments are made to a few early investors to prove that the investment isn't crooked. These fortunate few are known as "songbirds", because they sing the praises of the scam to others, thus bringing in new victims. *The Ponzi scheme collapses when the number of previous investors seeking a return exceeds the number of new investor's bringing in additional money. Precious metals have always attracted investors. They include tangibles such as gold and silver and seem particularly appealing to investors during uncertain times. Con artists urge jittery investors to put their savings into something they can hold on to rather than paper investments such as stocks and bonds. There are several examples of precious mentals schemes: Coin swindles. Swindlers may sell consumers low-quality coins that they claim are valuable. These coins often arrive in poor condition or are never sent at all. Gold mining schemes. How does buying gold, silver or platinum at dirt-cheap prices sound? That is the promise of swindlers who claim to be able to sell precious metals directly from mines using a new technology to recover trace amounts that other mining firms have not been able to retrieve. Securities regulators sometimes refer to these schemes as "dirt pile" swindles involving promises of "no-see-um" gold because investors never see the promised precious metals. All they get for their money is dirt. Bullion deals. How can swindlers avoid delivering promised goods, such as gold bars? One popular tatic is to stall by offering bullion storage services so that a consumer who suppposedley buys precious metals in bullion form can have them stored in a vault. The investor never even sees the product, in this case, gold bars an open invitation to fraud. In one major scam, con artists pocketed millions of dollars of investor funds and never bothered to buy the gold. Stock swindles pose a major threat to consumers. In the late 1980's, small investors lost $2 billion in scams involving penny stocks, so named because the shares sell for less than $3. In the late 1990s, investors were victimized in the systematic manipulation of "micro-cap" stocks, which are little known company stocks with relatively small numbers of shares that can be easily manipulated. A stock swindler may claim that a company has developed a cure for AIDS or is about to announce a business deal that will cause its stock to double or triple in value. In a penny stock example, con artists convinced investors to put millions of dollars into a non-existent company supposedly developing a self-chilling bevrage can that would eliminate the need to refrigerate soda and other liquids. The deal failed and investors saw their money go down the drain. To see how investment swindlers use email to hype investors to http://www.investingonline.org/isc/index.html and go through the "Don't Get Burned" simulation. Phony international investments is a fast growing area of interest for U.S. investors. With the rapid pace of political and economic changes overseas and the strong performance of some foreign stock markets, many American consumers are investing funds abroad. Con artists have responded with international investment schemes. Even when U.S. investors deal with legitimate investment opportunities overseas, they remain vulnerable to such factors as loose or nonexistent investor protection regulation, currency fluctuations, limited opportunities to pursue grievances and political instability in some nations. Affinity fraud describes investment schemes that prey upon members of identifiable groups. Con artists promote affinity scams that exploit the sense of trust and friendship that wxist in groups of people who have something in common. Con artists recognize that the tight-knit structure of many groups makes it less likely that a scam will be detected by regulators and law enforcement officials and that thaose who become victims will be more likely to forgive one of their own. Affinity fraud is also dangerous because the usual warnings about investment schemes promoted by strangers don't apply. In these cases, a friend, collegue, or someone else who inspires trust may introduce the investor to the scheme. Affinity fraud swindlers will enlist respected leaders within a community or group to spread the word about an investment deal. The key to avoiding affinity fraud is to check out everything, no matter how trustworthy the person may be who presents the investment opportunity. Bogus Franchise and Business Opportunities appeal to the dream of being your own boss. In fact, legitimate franchise operations may soon account for a majority of all retail sales made in the United States. Unfortunately, con artist realize that the desire of many Americans to own their own business may make them less cautious when it comes to evaluating franchises and business opportunity deals. Such investments may be promoted on the basis of the fear of losing a job or general uneasiness about the economic situation. Ads for fraudulent business opportunity schemes may appear in otherwise reputable television programs, newspapers, and magazines. Investors incorrectly assume that because the media outlet is reputable the advertisers are as well, not realizing that the media outlet may not screen its advertisers. Ads for frauds often offer high income to the person who will invest enough to cover individual start-up cost, ranging from $50 to several thousnad dollars. The only people who make money are the swindlers who receive the start-up investment money. Fraudulent business opportunity ads frequently appeal to people who have few job skills and are desperate for money. Examples include work-at-home an animal raising schemes.
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