Investment Fraud

Protecting Yourself Against Fraud

It is difficult to check on an investment. There are no tires to kick, and you can't take it on a test drive. Key facts may be presented in a way that's hard to understand or they may be completely invented. Furthermore, the people making the investment sales pitch are often fast talking and persuasive, convincing their victims to part with their money before they've even had a chance to consider whether or not the investment is right for them. These con artists often hold themselves out as successful businesspeople with impressive office locations and official looking publications.

Every year, Americans lose billions of dollars to swindlers who prey on people's greed and concerns about the future. The best way to defend yourself from would-be crooks is to always be on the offensive. By learning about the different kinds of securities fraud and being able to recognize the warning signs, you can avoid becoming a victim.

There are many investment opportunities awaiting you.  As an investor, your task is to identify those investments with the greatest potential while meeting your personal investment goals. You may be solicited by phone calls, e-mail, postal mailings, or even door-to-door salespeople. Most investment scams begin on the phone or by e-mail. Be prepared to deal with investment scam artists.

Before you send money to anyone, investigate the company making the recommendation, the salesperson, and the investment opportunity by asking questions and checking references. You can begin by using FINRA’s Broker Check database at https://brokercheck.finra.org or making a Freedom of Information Law request to the Office of the New York State Attorney General using the online FOIL Form.

As part of your investigation of the company making the recommendation, you should also check the list of unregistered soliciting entities published by the U.S. Securities and Exchange Commission at https://www.sec.gov/enforce/public-alerts and reading the SEC’s press release about that list at https://www.sec.gov/news/press-release/2021-247

Be familiar with common investment scams and be ready. Have a set of questions to ask callers. Being prepared allows you to assert yourself and helps you detect offerings that sound too good to be true and callers who are suspiciously resistant to your questions.

Make sure you thoroughly understand the investment and its risks before you invest. Be informed and certain of what you're buying and who you're buying from before you invest.

Legitimate investment professionals encourage you to ask questions and to have as much information as possible. They want you to clearly understand the risks involved. They want you to feel comfortable with the investments you are making. Con artists want you to believe them and not ask questions. All they're after is your money.

Warning Signs: Techniques typically used by Crooks

High Pressure Sales Tactics

Beware of sales pitches, whether from individuals or in ads, that urge you to get in on the ground floor or to act at once. Avoid being pressured to make a quick purchase at a "low, low price," to buy now because "the deal is only good for today," or overreact to being told "don't be a fool," or "when this becomes public knowledge people will be lined up to take advantage of this golden opportunity." Shady promoters may even offer to have an express delivery service pick up your check! They don't want you to take time to think, read the small print, or let you discuss the investment with a third person.

Promises of Exorbitant Profits

No honest investment or business is built on quick, astronomical profits. If it sounds too good to be true, it probably is.

Claims of No Risk or Minimal Risk

Return on investment is guaranteed. Assurances that "you can't go wrong" are a sure tip that you are being conned.

Evasive Answers and Lack of Communication

Con artists don't want you to ask questions. Instead, they will answer by asking you questions. These are usually ones intended to get a positive response. "You would like to make more money, wouldn't you?" A promoter's unwillingness to provide details and written information or to respond directly to inquiries should diminish your enthusiasm. He or she is probably hiding something.

Withholding written information and references

A swindler may try to convince you that there isn't time to provide something in writing. Getting something in the mail, however in any event, is no guarantee that the investment is legitimate. Slick brochures and glowing testimonials can be filled with falsehoods and distortion.

Requesting your checking account or credit card number

Callers may claim to need your credit card or checking account number in order to verify that you are a reputable customer, or to show your good faith in this special deal. Once you provide this information, it's used to make fraudulent purchases.

Offer to pick up the money at your home

It is common for swindlers to avoid traditional forms of shipping to protect themselves from prosecution under federal postal fraud laws. If a salesperson offers to send a courier to pick up money, this should raise a red flag.

Promise of a free gift or trip

When signing an acceptance form for a gift that the consumer has "won," it may actually indicate that the victim is purchasing additional items. Before signing any form, read the fine print carefully.

Avoid Any Investment that isn't Clearly Described in Detail

Swindlers often declare that the specifics are "too technical" to describe in layman's terms or that the information is "classified" or "confidential." Don't buy it. A prospectus must accompany all investments. If it is that complicated, you probably don't want to be involved. Don't invest on the basis of trust, even with people you know.

Unprofessional Conduct

They refuse to return phone calls, answer correspondence, or give out their phone number and physical address. Callers can only get an answering machine. They always want to meet you someplace other than their offices. These are all warning signs of fraud. The con artists may have fancy offices, cars, and professional receptionists. If they weren't slick, they wouldn't stay in business very long.

Promises of "Inside Information"

Never buy on the basis of rumors, hot tips, "insider information," an unannounced breakthrough, or the seller's ability to predict future events.

When hounded on the phone by a promoter, don't be afraid to hang up without explanation. You do not owe the caller anything. This kind of solicitation is an invasion of your privacy. If you have any doubts make no promises or commitments, no matter how tentative. It is far better to wait and lose an opportunity than to take the plunge and lose everything.

Asking questions like those presented above aren't likely to produce honest answers, but the fact that you are asking questions can cause a con artist to discontinue the conversation. However, even if you ask the right questions, experienced con artists can skillfully, albeit dishonestly, answer your questions. They can evade answering them by asking you questions like "you don't want to lose out on this tremendous opportunity, do you?" or, "wouldn't you like to never have to worry about money again?" Don't let them feed on your fears or greed.

Beware of Investment Fraud

Common Investment Scams

Investment Seminars and Financial Planning Activity

Scam Artists use investment seminars and pose as financial planners offering appealing and farfetched investment advice to the unsuspecting investor. Much of the advice they give during these seminars may require them to be licensed or registered, and they may fail to disclose conflicts of interest, as well as hidden fees and commissions. The extra fees or phony investment opportunities are usually not discovered by the investor until it is too late.

Annuities

A contract written by a life insurance company to provide continuing income for a specified amount of time. Payments are generally made on a monthly basis or in periodic installments, in most cases to supplement retirement income. Investors are often induced into buying annuities that are unsuitable, misguided and inappropriate for their situations. Because annuities can be a vital form of financial protection for seniors, the misleading and ill-advised information given to them can be devastating.

Illegal securities Offered as Individual Retirement Account (IRA) Investments

Increasingly, unscrupulous self-directed IRA custodians are offering to hold unlawful and fraudulent securities in IRA accounts. When the fraudulent or illegal nature of the securities becomes clear, investors may not only lose their entire investments, but may be faced with additional IRS and administrative penalties as well. Many investors believe that just because an investment is being held in an IRA account, it is safe and legal. Investors must ensure that the investment is properly registered and is being offered by a properly licensed salesperson'

Whenever a promoter accepts IRA money there is an imputed credibility to the deal. People wrongly assume that if retirement money can legally be deposited in a certain deal, then that deal must have been "checked out by the IRS and blessed as legitimate."

"Callable" CD's

These higher-yielding certificates of deposit won't mature for 10-20 years: unless the bank, not the investor, "calls" or redeems them. Redeeming the CD early may result in large losses -- upwards of 25% of the original investment. Sellers of callable CDs often don't adequately disclose such risks and restrictions to investors.

Promissory Notes

Promissory Note scams offer investors a promise of high returns at low risk. They are often sold by independent insurance agents. Many of the notes are short-term debt instruments issued on behalf of a fraudulent institution or companies that don't exist, each promising high returns upwards of 15% monthly -- with little or no risk, typically with a maturity of 9 months.

Predatory Lending

Predatory lending consists of a variety of home mortgage lending practices, where predatory lenders will pressure consumers into signing loan agreements that are not in the consumers best interest or that they cannot afford. The scam artist may use a combination of false promises and deceptive sales practices to convince the borrower to commit before they are able to have full knowledge of the agreement.

Prime Bank Schemes

Scam artists promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. Users of these types of schemes often target conspiracy theorists, promising access to "secret" investments used by the Rothchilds or Saudi royalty.

Internet Fraud

The Internet's wide reach and supposed anonymity are two attractive features for scam artists. They use the Internet for a wide variety of scams including pyramid schemes; promotion of bogus "prime bank" investments; and enhancing the sale of thinly traded stocks. The Attorney General urges investors to ignore anonymous financial advice on the Internet, via e-mail or advertisements.

Affinity Group Fraud

Affinity fraud occurs when scam artists use their victim's religious or ethnic identity to gain their trust, knowing that it's human nature to trust people who are like you. Advertising in the media that serves specific ethnic groups is used to identity potential victims, often with offers of employment, training or financial advice. Often, however, the scheme is perpetuated by simple word of mouth.

Ponzi/Pyramid Schemes

Ponzi schemes are swindles in which tremendous rates of returns are paid to initial investors out of funds from later investors, who end up losing all of their money when the house of cards falls down. A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all emphasis on bringing in new members/investors and not on selling the product or service.

Common elements of a pyramid scheme:

• An invitation from a friend, neighbor, or co-worker to attend an "opportunity meeting"
• A well-rehearsed presentation that offers an exciting shortcut to wealth and adventure
• Hefty fees for products, courses, etc., or for the right to recruit others and profits from their participation
• An emphasis on recruiting others to keep the pyramid growing.
   

More information on Pyramid Schemes

Viatical Investment Scams

Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in the final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker. These investments are extremely high risk, particularly for seniors.

Boiler Rooms

Named after the rented office spaces they use to "turn the heat up" on potential investors, these fly-by-night operations rely on "cold calls" and fast talking to make their sales. Boiler rooms are great vehicles for scammers because it is often difficult to distinguish scams from a legitimate developmental business. Warning signs that you may be the target of a boiler room schemes include:

• strangers calling you from another state trying to sell you unfamiliar investments;
• vague and automatic responses to all of your questions;
• refusal to disclose the street address of the office, instead referring potential customers to drop boxes; and
• high pressure sales tactics, such as claiming that the opportunity will vanish if you don't invest immediately

Precious Metals Deals

Precious metals have always attracted investors. Such tangibles as gold and silver 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 55 bonds. There are several examples of precious metals schemes:

Coin Swindles

So called "rare coins" are often sold to unwary investors who are led to believe that they are a good investment that will increase in value over the years. Representations made about the expected increase in the value of these coins are almost always untrue and part of a scam perpetrated against unsophisticated, often elderly victims. Such scams are conducted out of "boiler rooms" from which unscrupulous salespeople with no expertise in the coin market make hundreds of unsolicited phone calls to people whose names appear on so-called "sucker lists."

The salespeople use high-pressure sales tactics and convey a sense of urgency about closing the deal. They also misrepresent the value of the coin, its scarcity and where it was obtained. For example, a victim may be misled into believing that the coins were recently obtained through an exclusive estate sale and are in very short supply. A common tactic used by these scamsters is to falsely promise to rebroker or resell the coins to another investor for a profit so that the victim is led to believe that he or she cannot lose money. Often, these coins are delivered in poor condition or are never sent at all.
 

Gold mining schemes

How does 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. They claim that a new technology will be used to recover trace amounts that other firms have not been able to retrieve.

Bullion deals

How can swindlers avoid delivering when they promise gold bars? One popular stalling tactic: They offer bullion storage services where a consumer supposedly buys precious metals in bullion form and then has them stored in a vault. This is an open invitation to fraud. In one major scam, con artists simply pocketed millions of dollars of investor funds and never bought gold.

Stock swindles – Pump and Dump Schemes

Swindlers tout a company's stock (typically cheap stock -- less than $5) through false and misleading statements to the marketplace. Usually a small group of informed people buy a stock before they recommend it to thousands of investors. They may claim that a company has developed a cure for AIDS or is about to announce a huge business deal that will cause its stock to double or triple in value. The result is a quick spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock early sell-off when the price peaks at a huge profit. Most pump-and-dump schemes recommend small companies which are more volatile making it easier to manipulate a stock because there's little or no information available about the company. After pumping up the stock, fraudsters make huge profits by dealing their cheap stock on the market. The remaining shares can become worthless.

A recent variation on this scheme is that messages are left on telephone answering machines misleading the recipient of the call into believing that he or she is accidentally overhearing a message telling a third party about a "tip" on a stock. The same is being done with faxes which are meant to appear as if they had been sent to the wrong party. Apparently people fall for this trick, perhaps because they think they are getting something for nothing.

Phony International Investments

With the strong performance of many foreign stock markets, many American consumers are investing some of their funds abroad. Con artists have responded by offering scams with an international flair. In one case, con artist fleeced 400 investors out of $7 million by promising 30 to 40 percent returns on certificates of deposit and other investments through a bank in the Marshall Islands. In fact, the bank existed only on paper and its sole officer was a Marshall Islands gas station attendant who picked investors' checks and mailed them back to the con artist. 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. Smart investors will exercise extreme caution before putting money into any foreign investment.

Bogus Franchise and Business Opportunities

The dream of being your own boss is the primary appeal of franchises and business opportunities. Con artists 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 costs, ranging from $50 to several thousand 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 and animal raising schemes.

Unregistered Investment Products

Con artists bypass state registration requirements to pitch such products as pay telephone and ATM leasing contracts and other investment contracts with the promise of "limited or no risk" and high returns.

Unlicensed Individuals Selling Securities

Anyone selling securities without a valid securities license should be a red flag for investors. Ask the seller to complete the "Check Before You Invest Form."

Avoid Online Investment Fraud

The Office of the New York State Attorney General urges ordinary investors to be careful when considering investment opportunities advertised online and consider these tips for recognizing and avoiding fraudulent solicitations on the Internet.

• Don’t Wire Money to Someone You Don’t Know
  • It’s probably a scam, and you’ll probably never see that money again.
     
• Don’t Share Your Personal Information
  • Anyone who asks for your bank account details or Social Security number is probably trying to steal your money – or even your identity.
     
• Double Your Money? Triple Your Money? More Like Steal Your Money
  • Don't be tempted by outlandish returns, particularly when returns are promised within weeks or months.  If it sounds too good to be true, it probably is.
     
• Don’t Believe in “Guaranteed” Returns
  • Investing involves risk, and big returns usually come with big risks.  Even someone who isn’t out to steal your money may invest it in a financial product that’s much riskier than you were led to believe.
     
• Don’t Fall for “Must Invest Now”
  • Don’t be pressured into a quick decision.  Better yet, get a second opinion.  Show the post to a trusted friend or family member for a reality check.
     
• Don’t Invest if You Don’t Understand
  • Con artists often claim to use complicated strategies that the average person can't understand.  But these supposedly complex schemes are usually pretty simple: they’ll take your money and run.
     
• Fees?  What Fees?
  • Investment promoters may conveniently forget to mention their management fees or penalties for early withdrawal.  Don’t be afraid to ask questions.
     
• Don’t Pay for “Inside Information”
  • A Wall Street insider is not going to share valuable information with a stranger.

Helpful Documents