Think it's only the elderly falling prey to investment scam artists? Check out the Financial Fraud Enforcement Task news page.
From investment fraud to mortgage fraud, scam artists have been keeping this organization very busy since it was established by the Obama Administration in 2009.
What Are the Most Popular Investment Scams?
The FBI lists five major investment-related scams. These include letter of credit fraud, prime bank note fraud, ponzi schemes (think Bernie Madoff) and pyramid schemes (franchise fraud) and market manipulation.
A Bundle of Confusion
While these two sites offer helpful information on recognizing the specific investment scams, it's not very clear why and how these scams are so successful. Deciding that this was something our readers needed to know, InvestingAnswers talked with Richard Feldman, managing partner of Miami-based Investor Solutions, and Louis L. Straney of Santa Fe-based Securities Fraud Research and author of The Investor's Guide to Loss Recovery: Rights, Mediation, Arbitration, and Other Strategies, to find out more.
Understanding Investment Scam Psychology
InvestingAnswers: Mr. Straney, why do investment scams work?
Louis Straney: There are two themes that make investment scams possible. The first is the efficiency of low technology and the second is trust. Low technology means the person can perpetuate the scam in a church, a letter to the family or even through a phone call. Trust comes from the scam artist saying, 'We're from the same generation, attend the same church or, we went to the same high school -- you can trust me.'
InvestingAnswers: So what kind of investment scams do low technology and trust perpetuate?
LS: There are three types. High yield investment programs, conspiracy theories and affinity fraud.
High yield investment programs address investor frustrations over low interest rate yields. The scammer offers double digit yields through either a Ponzi scheme or some type of membership program that is very attractive to the elderly living on fixed incomes and are struggling to stretch their dollars.
InvestingAnswers: How do these high yield investment program scammers target their victims?
LS: The scammers target civic groups and churches. To make the scam appear more legitimate, the scammers will build internet websites, use direct mailing marketing or put ads in small town newspapers to attract their victims.
InvestingAnswers: What are the conspiracy theory scams?
LS: Conspiracy theory scams play up the doomsday scenarios. Oil prices are going up, interest rates are low, so we better buy precious metals and oil futures before things get worse.
These types of investment scams are touted as savings and money making opportunities but are really just speculative or outright fraud. Typically, the elderly, those living in rural areas or religious communities will fall for these because of concerns over rising oil costs, low interest rates or because they don't have ready access to traditional advisers telling them whether or not the investment is a good one.
InvestingAnswers: So what is 'affinity fraud'?
LS: Affinity fraud is where the scam artist says, 'You should invest with me because we have things in common.' Maybe you belong to the same Rotary Club, the same church or simply are the same age and agree on what your generation really needs.
This is particularly bad in the west where sparse populations and the center of social activity is often found around a church or a civic organization. Ultimately, someone in the group becomes the 'Anointed One' where money making talents are concerned.
Affinity fraud is decades old but is particularly prevalent now because it's often layered with high yield investment and conspiracy scams -- a perfect fraud trifecta, if you will.
InvestingAnswers: Switching now to Mr. Feldman. What are the best ways to avoid becoming a victim to one of these investment scams?
Richard Feldman: Remember that many times, investing decisions are more emotional than objective. Scam artists will play on this because they are gifted at developing emotional relationships with their victims. That being said, I recommend four ways of determining whether or not a deal is too good to be true.
First, do your homework. Can you verify all your assets from a third party custodian like Fidelity? Who has custody of these assets? Can the adviser access your money without your written consent? Are the investments insured? Can you independently reconcile your monthly statements through the third party custodian? Verification checks like these will go a long way toward reducing your chances of getting scammed.
Second, understand the investment. If it's too good to be true, it is. There is no free lunch and there are no investments guaranteed to earn 8-10%. Those that do earn these kinds of returns, are volatile.
Third, look at the person with whom you are doing business. If you're not 100% comfortable, check the credentials to see if there are any regulatory marks on record. The SEC has a data bank for Registered Investment Advisors which fall under the Commission's jurisdiction. You can also check with your state's security regulator. Do a little digging. After all, even Bernie Madoff had some regulatory issues early on in his career during the late 1970s.
Fourth, make sure there's a reputable accounting firm involved with the investment. This is especially important if you are giving the company money that will be commingled with other investor assets and not listed in your own name or under your custody. The accounting firm should be large, reputable, insured and bonded.
InvestingAnswers: Do you ever see these investment scams going away?
RF: There will always be someone out there trying to prey on other people. If anything, I think it's only going to get worse with social media, internet and other technology advances.
LS: I estimate that 5% of the American population is affected by investment fraud and much of it goes unreported due to the victims feeling ashamed and embarrassed
Taking Action Against Investment Scams
InvestingAnswers: So what can a victim do to bring action against the scammer?
LS: First, get over the embarrassment. You are not to blame for what happened and there are cost effective ways to do something about it. Many law schools have free legal clinics that will help victims file a complaint or take further legal action against the perpetrator. Additionally, I suggest checking with the appropriate state bar association that can pair the victim up with a licensed attorney seeking to do pro bono work.
To learn more about spotting a con artist or avoiding investment scam traps, visit NASAA's Fraud Center, the FBI's Common Fraud Schemes page or the Federal Trade Commission's Investment Risk Facts site.