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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you get that credit card increase you want.
How Unlocked Car Doors Can Lead to Identity Theft: These small things that can have a big impact on
preventing identity theft just may surprise you.
Why Free Anti-Spyware Software Isn’t Always A Good Deal: Make sure you don’t fall for
a free spyware scan scam with these need to know facts.
What You Need to Know Before Adopting a Pet:
When adopting a pet, make sure you keep an eye out for the following red flags.
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
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
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
They are all easy to sidestep. Just don’t believe anyone who
says they can deliver big money for little or no risk. They
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
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
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
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
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
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
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!