The US Securities and Exchange Commission in December 2020 issued an investor alert warning about the rise in financial and investment scams. The SEC identified scams such as Ponzi schemes, fake stock promotions, fake CD scams, and community-based financial scams. Let’s dig deeper to understand these scams.
Investment Scams Type 1: Ponzi Schemes
Ponzi schemes work by attracting new investors who pay existing investors. This leads the existing investors to think that their investment is giving them returns. Eventually, the scheme runs out of new investors, causing the existing investors to lose their money. Ponzi schemes have been on the rise since the start of the pandemic. You can identify them based on these features:
- Guaranteed high returns on your investments. Every investment comes with different risks and no guarantee of returns. Higher return investments also have a high risk. Therefore, when someone approaches you with an investment opportunity that seems too good to true (high-return/low-risk investment), it is best to avoid it.
- Unlicensed or unregistered sellers. Ponzi schemes are run by unregistered or unlicensed sellers. Therefore, you should always verify that the company or seller you are working with is registered and licensed.
- Overly consistent returns. Returns from investments often fluctuate with market conditions. Therefore, if an investment promises steady returns regardless of the market conditions, you should be skeptical.
Investment Scams Type 2: Fake Stock Promotions
Criminals take advantage of the potential growth companies offering COVID-19 services or products are likely to experience. These criminals advertise themselves as developing vaccines or cures for COVID-19. They claim their stocks will likely grow as a result.
The SEC warned investors to be cautious when faced with such offers, as they could be hyped-up promotions from criminals dealing in pump-and-dump scams. These eventually leave investors with useless stocks and heavy losses.
Type 3: Fake CD Scams
Criminals also issue fake certificates of deposits to investors looking for investments with fixed-rate returns. Spoofing is common with these investments. The criminals will provide a spoofed website that resembles that of a legitimate financial institution. Some of the signs that you are dealing with a fake CD scam seller include:
- A website offering high-interest returns and no penalties for early withdrawals
- The website does not offer other financial products except certificates of deposit
- The website requires you to wire money abroad or to an account whose financial information is different from that of the legitimate firm.
Type 4: Community-Based Financial Scams
Community-based or affinity fraud relies on the trust and ties members of a community have with each other. For instance, these criminals might pretend to be part of a community with common ties such as ethnicity, sexual orientation, nationality, religion, age, or military service. However, their goal is to defraud members of that community. You can avoid such scams by investigating the broker’s background before investing your money.
Tips to Avoid Finance and Investment Scams
You can avoid COVID-related investment and finance scams by following some of these tips.
- Do not respond to high-pressure sales pitches that demand immediate action or the risk of missing out on an investment.
- Be skeptical of online reviews and testimonials that claim to have benefited from certain investments. These testimonials could be fraudulent. Do thorough research to find out if the company is legitimate.
Investors should exercise caution and due diligence before making investments. There is especially great need for skepticism when offers seem too good to be true.