7 Deadly Sins: Investment Scams Promise Shortcut to Economic Recovery

With the economy on the slide, 2009 could be a big year for these investment scams: Internet ScamBusters #320

When times are hard, people search for money-making ideas and hucksters turn to investment scams.

They promise high returns with low risks, new ways to invest and then pretend to have inside information — all with the aim of relieving hard-pressed savers of their money.

In this issue, we explore the 7 key areas where the scammers are most likely to strike.

Before we begin, we encourage you to take a look at this week’s most popular articles from our other sites:

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Let’s get started…


7 Deadly Sins: Investment Scams Promise Shortcut to Economic Recovery


The likelihood of a long, drawn-out recession and the anxiety we share about the slump in our savings and stock portfolios is the perfect scenario for crooks to lure us into investment scams.

This year more than ever, many people are on the lookout for opportunities to stretch what money we do have and to increase our income if we can. But, with the dramatic $50 billion collapse of the Madoff Ponzi scheme fresh in our minds, we need to be doubly-alert to the threat of investment scams.

Trouble is, as any psychologist will tell you, it’s the very concern about our dwindling savings that makes us more susceptible to schemes that seem to offer a way out. So this week we list the 7 types of investment scams you’re most likely to encounter in this tough economic climate.

1. High return/low risk schemes

Interest rates are extremely low, so higher returns represent a degree of risk — and don’t believe anyone who tells you otherwise.

Ponzi schemes, the most common type of investment scams, typically offer way above current rates, but depend on income from new investors to pay out the longer-standing customers — until there’s not enough coming in to pay out.

You can find tips on how to spot and avoid Ponzi schemes in Investing Safely: How to avoid investing scams, Ponzi schemes and scandals.

Even if high returns are not part of the offer, low risk is often a sufficient lure to pull in victims to investment scams. Affinity investments fall into this category. Investors are enticed into making an investment by someone who shares their interest (an affinity), for example a fellow church-goer or club member.

Read more about these affinity schemes in Improving Financial Literacy and Avoiding Affinity Scams.

But Ponzi and affinity schemes are merely two of hundreds of high return/low risk investment scams now parading in front of hungry investors. The growth in spam, bogus websites and “boiler room” telephone marketers presents seemingly mouthwatering investment prospects every day — like “guaranteed” double digit returns and the promise that “you can’t lose.”

They are all easy to sidestep. Just don’t believe anyone who says they can deliver big money for little or no risk. They can’t.

2. Collectibles

If the stock market seems a shaky place for your savings, you may be tempted to look elsewhere for better returns.

Collectible items, from baseball cards to rare and highly sought-after antiques, could be a solution — but only if you know your stuff. And by that, we don’t just mean in-depth knowledge of the subject area but also knowing how to spot a fake.

Unscrupulous antiques dealers and online fraudsters are only too happy to describe impressive returns. Sometimes their figures have been plucked out of thin air; other times they conceal huge swings in values caused by minute differences in condition or subject.

And then, as we say, sometimes the products they offer are just forgeries. This is especially the case with supposed rare coins and autographed memorabilia.

For more on antiques scams, you can read this Scambusters article: The 7 Most Common Antiques Scams and How to Avoid Them.

But the bottom line is that, unless you’re an expert and a specialist, give a wide berth to collectibles or dealers who invite you to invest in their business.

3. Investing offshore

It used to be that offshore investing — depositing your money with an overseas bank or investment institution — was just for the wealthy and the experts. But the advent of the Internet and the elimination of some of the restrictions on moving money about have opened this opportunity to just about everyone, including the scammers.

The come-on is usually an offer of high, tax-free returns. And while it’s true that returns may be marginally higher, so is the risk of loss. And while there might be some tax advantages, tax laws are complicated and you still most likely have to pay the IRS (for our US subscribers) or a similar agency elsewhere.

The real problem is that, without thorough research, you may be putting your money with a disreputable (or even non-existent) organization in a country that does little or nothing to police supposed financial institutions. And they’re out of reach of the US authorities — which means no protection for you.

Yet, these same organizations can set up impressive websites and produce lavish brochures, implying they’re safe as houses. We all know what’s happened to the value of houses…

Unless you have the time, expertise and resources to investigate offshore investment opportunities, you’re best to keep your money onshore. The risk of becoming a victim of an investment scam is just too great.

4. Unknown instruments

Time was when you could just buy a stock, a bond or a Treasury Bill. But these days, the world of investment is teeming with little-known financial instruments. Fraudsters claim they know about and have access to them.

In some cases, they don’t even exist — like “prime bank securities” that are supposedly high-yielding paper traded between the world’s biggest banks. Other times, they do exist but carry huge risks: things like arbitrage (trading stocks or currencies between different markets), promissory notes (the corporate equivalent of IOUs) and foreign exchange — especially if you don’t know what you’re doing.

Scammers fool their victims by seeming to have inside knowledge of these investments but even real experts have been known to lose a fortune in these volatile markets. Don’t join them.

5. Inside information

The theme of being privy to inside information is one of the biggest sources of investment scams — and the growth of Internet-based information sharing is likely to make this even more common in 2009.

Using bogus tip sheets, bulletin boards and chat rooms, and, of course, spam, crooks try to manipulate share prices. Usually, but not always, this involves a tip about a tiny company that’s supposed to be on the brink of a major breakthrough.

A nod and a wink from the scammers prompts money to pour into the stock, pushing up the price and allowing the scammers to then dump their shares at the top.

This is the well-known “pump and dump” investment scam. But increasingly, its evil twin — “short and distort” — is starting to appear. With this technique, scammers sell stock they don’t actually own, then leak false information into the marketplace, causing the price to fall.

The scammers then buy the stock at the lower price and deliver it to the person they originally sold to at the higher price.

To avoid these schemes, never buy or sell a stock on the basis of an unsubstantiated tip. Check it out for yourself.

6. Oil and gas investment

Even though the price of oil has fallen a great deal with the economic downturn, it is still a precious commodity, the long term value likely to climb again in the future.

For now, though, oil stocks are depressed, a situation that scammers can dress up as a ground floor opportunity to get into this market. Fair enough — but only if you can be sure that the oil company you’re investing in has real prospects for success.

Many small companies need investors’ cash to finance their explorations and some are not above distorting the truth to get it. Others are simply fronts, using the lure of oil riches to steal money from investors.

Be skeptical of small firms claiming to be on the brink of a discovery or using nearby drilling by a well-known oil company as credentials. Even if it’s a legitimate exploration company, the risks, for most of us, are unacceptably high.

7. Bogus and shady advisers

We saved the best — or the worst, depending on how you look at it — until last.

In these uncertain times, there’s no shortage of people ready to tell us how to make the best of our investments. Some of them are out and out frauds, ready to direct our money into schemes that give them a hefty fee and us a low return.

Recent examples have been persuading people to take out variable annuities, which may produce relatively low returns and can lock capital sums away for years or even forever. Perhaps these investments are appropriate for some; but make sure you truly understand all the risks and terms.

There are also shady stockbrokers who take your money but never buy the stock you thought you were ordering, and so-called tax consultants who charge a juicy fee supposedly to make your investments more tax efficient but, in fact, do little or nothing.

A popular trick is to hold seminars, with free refreshments, at which investors, often seniors, are persuaded to change their investment strategy and to entrust the individual with their money.

Of course, most such advisers are legitimate but we urge you to thoroughly check out the claims, reputations and registration of these individuals before making any decision about your investments.

Looking back over our seven categories of investment scams for 2009, it may seem we’ve added to the economic gloom that clouds the horizon at the moment. But our real aim is to help you protect what’s left of your hard-earned savings.

This is not the time to take chances with people you don’t know. Keep the scammers’ hands off your cash.

Time to conclude for today — have a great week!