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Exploring Why & How There is a 75% Rise in Investment Scams Globally

Category: Investment Scams
Length: 20 Pages
Reading Time: 30 min

Excerpt: We were left with the impression that the most common victims of investment fraud are large corporations or extremely wealthy individuals. Actually, fraud comes in many shapes and sizes, and increasingly, scam attacks have been trickling down to lower tier investors. Con artists are leveraging networks of innocent victims to expand their operations, and it’s being done online!

March 22, 2022

Introduction

When someone tries to trick you into investing money, this is known as investment fraud. Investors may ask you to put your money into stocks, bonds, notes, commodities, foreign currencies, or even real estate, depending on your situation. A scammer may deceive you or provide you with false information about a legitimate investment opportunity. Alternatively, they may invent a false or misleading investment opportunity. Investment fraudsters may pose as telemarketers or financial advisors in order to defraud you of your money.

They appear to be well-educated, friendly, and charming. They might tell you that you need to act quickly on an investment opportunity. They are attempting to gain your confidence in order for you to transfer money to them as quickly as possible and without asking many questions. Scammers make promises of large payouts, quick money, or guaranteed returns in exchange for your money. If an investment opportunity appears to offer a high return with little or no risk, it is almost certainly a scam. If it appears too good to be true, it almost certainly is – and is highly likely to be a scam. Anyone who promises you quick money should be avoided at all costs.

When it comes to convincing you that an investment is legitimate, the returns are high, and the risks are low, scammers are experts. There’s always a catch, as they say. An investment scammer may claim to be offering: guaranteed, quick, and easy investment returns and sometimes tax-free benefits, investments in stocks, cryptocurrency, mortgages, real estate, or virtual investments with ‘high returns,’ commissions for growing their client base and bringing in new clients, an opportunity with no risk or low risk because you will be able to: sell at any time, get a refund for non-performance, and have insurance coverage.

It is also common for scammers to pose as legitimate businesses in order to pitch their offers. They may offer insured or ‘guaranteed’ transactions, the ability to swap one investment for another, inside information on initial public offerings (IPOs), or discounts for early bird investors.

With several people falling into the trap of investment scams these days, it is not only important but also necessary to be well informed and educated on this topic. Other than that, if this strikes your interest and you want to learn about the different kinds of investment scams and how you can avoid falling victim to them, continue reading this article!

Do not let anyone pressure you into making decisions about your money or investments and never commit to any investment on the spot.

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Table of Contents

CHAPTER 1: The Insightful History of Investment Scams

investment startup

Investment scams are among the top ten scams in terms of money lost in recent years, with losses ranging between $40 and $50 million. After being targeted by investment and cryptocurrency scams, 58% of those who invested did so in cryptocurrency, the most popular investment among that group, and 48% did so in individual stocks, the third most popular investment among that same group. Scammers targeted people who invested in mutual funds, which ranked second on their list of preferred investments. 

Despite the fact that these scams account for more than half of all scams (including phishing, online shopping scams, false billing, identity theft, hacking, remote access scams, classified scams, ransomware and malware, and dating and romance scams), they are largely unreported by the public and victims.

Scammers preying on investors and cryptocurrency users set new records in 2020 and 2021. Almost 26,500 cases were reported to the government, and those cases resulted in a loss of $419 million, according to the government. The use of cryptocurrency and social media by scammers has increased dramatically, and many people do not report when they are the target of a scam. 

In addition, nearly 75% of those who have been the target of fraud or a scam are less likely to invest in the near future. In the first quarter of 2021, the Federal Trade Commission received 14,079 reports of investment scams, with victims losing a total of $215 million during this period. The percentage of reports that reported a loss, the median loss, and the total loss were all on track to surpass the figures reported in 2019, which were already significantly higher than the figures reported in 2019.

future crypto

Scammers are most likely to target people between the ages of 30 and 39. The age group of 20–29 years old reported the second-highest number of cases. Those between the ages of 40 and 69 reported higher losses due to fewer cases. 45% of those who have been targeted by scams believe that financial and government institutions have done a good or very good job of educating the public about investment and cryptocurrency scams, respectively.

40% of Baby Boomers believe those institutions have done a poor job, a higher percentage than any other generation in the survey’s history. This suggests that there is a need to improve fraud and scam education and public awareness. Only 62% of those who were the target of an investment or cryptocurrency scam filed a report with the appropriate authorities. 37% of those who did not file a report stated that they were unaware that they could.

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58% of those who were targeted by an investment scam have since invested, although 75% of those who were targeted say they are less likely to invest in the future. In 2020, Americans lost more than $419 million as a result of investment fraud and scams. Over 25,000 investment fraud cases were reported in 2020, with over 20,000 of those cases resulting in a loss for the first time. It was expected that 2021 would be another record-breaking year across nearly every metric. 

Overall, investment fraud has increased consistently between 2017 and the first quarter of 2021, according to all measures. It is important to remember that notifying the government about scams increases the likelihood of getting your money back if you have been victimized. It also aids law enforcement in their efforts to identify and apprehend scammers and fraudsters. 

Reports provide authorities with a more complete picture of the types of scams and fraud that are prevalent, allowing them to better educate the general public on how to identify and avoid them.

CHAPTER 2: Was COVID-19 A Contributing Factor to The Influx of Investment Scams?

woman on mask

According to an investor alert issued by the Securities and Exchange Commission on Monday, there has been a significant increase in consumer complaints involving investment fraud during the Covid-19 pandemic. Ponzi schemes, forged certificates of deposit, bogus stock promotions, and community-based financial scams are just a few of the types of fraud that exist. 

Criminals are defrauding investors in greater numbers as they attempt to take advantage of the chaos resulting from the Covid-19 pandemic. According to the Federal Trade Commission, investment scams that promise high returns are a type of “income scam,” in which con artists prey on unsuspecting victims who are looking for ways to supplement their income.

Work-from-home and employment scams, as well as pyramid schemes, are examples of other types of fraud. According to an analysis of consumer complaint data published Thursday by the Federal Trade Commission, income scams increased by 70% in the second quarter of the year 2021 when compared to the same period in 2019. In the aftermath of the Covid-19 pandemic, thousands of Americans remain out of work, causing financial hardship for many families in the United States. 

According to an analysis by the Federal Trade Commission, the average American loses more money as a result of investment scams than any other type of income fraud.

economy blocks

Individuals have reported a median loss of more than $16,000, according to the organization. The average loss from investment scams is $24,000, and people in their 50s and 60s are more likely than others to report having lost money from them. According to the SEC, investors should be cautious of companies that inflate the value of their stock by making exaggerated claims about the coronavirus.Examples include companies claiming that they are working on a product or service that will aid in the prevention or treatment of the Covid virus and that their stock is poised to grow significantly as a result. 

They may be involved in a pump-and-dump scheme, which could result in significant losses for investors, particularly if a company makes untrustworthy claims and stock trading is eventually suspended.

CHAPTER 3: The Various Types of Investment Scams Prevalent in The Market Today

pyramid chart

Scam artists use investment seminars and pose as financial planners to defraud unsuspecting investors by offering them enticing and unrealistic investment advice. Much of the advice they provide during these seminars may necessitate their holding a license or registration, and they may fail to disclose conflicts of interest, as well as hidden fees and commissions, which could be detrimental to their clients. It is common for investors to be unaware of additional fees or phony investment opportunities until it is too late.

Promissory Notes

money roll

When a business issues a promissory note to raise funds, it is similar to lending or issuing an IOU. Promissory notes are a type of debt that can be used to raise funds. Most of the time, an investor agrees to loan money to a company for a specific period of time. A fixed return on the investment, typically consisting of the principal plus annual interest, is guaranteed in exchange for the investor’s commitment to making the investment. Despite the fact that promissory notes can be a legitimate investment, those that are marketed to a large number of individual investors are more likely to be scams.

The Securities and Exchange Commission (SEC) and state securities regulators from across the country have banded together to combat the fraudulent sale of promissory notes to investors. However, we will not be able to prevent every fraud. Before you consider investing in a promissory note, you should ask tough questions and insist on getting answers to your questions and demands. 

Make certain that you understand how they operate and the dangers they pose. These suggestions will explain how promissory note fraud can occur and will assist you in identifying the scams that are out there.

piggy bank

When it comes to a promissory note scam, the individuals who are perpetrating the scam are frequently hidden behind the scenes. They persuade others to sell promissory notes by promising them large commissions in exchange for their services. Individuals who sell promissory notes to investors frequently rely on the information they have been provided. They may not be aware that the information they have been provided is false or misleading. 

The individuals who run the scam use a portion of the money they collect from investors to pay the commissions to the sellers who are the victims of the scam. The fraudsters usually make off with the rest of the money. A promissory note is a type of financial obligation.

In most cases, an investor agrees to loan money to a company in exchange for the company’s promise that it will repay the principal, plus interest, over a specified period of time, known as the repayment period. Promissory notes are not typically available for purchase by the general public. 

It is possible for fraudulent promissory notes to be issued on behalf of fictitious corporations. It is possible that sellers will tell investors that the notes are a safe investment because they are backed by insurance companies. In addition, the sellers frequently guarantee a high rate of return. The majority of the companies that guarantee the notes, on the other hand, are not licensed.

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Fraudsters frequently prey on elderly investors who believe that investing in notes will protect them from the risks associated with the general securities market. Investors purchase the notes under the impression that they are less risky and offer a higher rate of return than the market. 

In some cases, sellers may encourage investors to cash in their life insurance policies and instead purchase promissory notes. In most cases, legally binding corporate promissory notes are sold to sophisticated investors, and retail investors should be extremely skeptical of any salesperson who approaches them with the prospect of selling them a corporate promissory note.

Investors should conduct due diligence on the person who is selling the promissory notes in order to avoid falling victim to a scam. In most cases, these sales representatives must be licensed in their state as well as with the Financial Industry Regulatory Authority (FINRA). Investors should also investigate whether the company issuing the promissory notes is legitimate and financially sound enough to meet its obligations. Notes that are supposedly insured or guaranteed, as well as notes that promise to be risk-free, high-yield investments, should all be treated with caution by investors.

Ponzi / Pyramid Scams

Ponzi Scheme

Pyramid schemes and Ponzi schemes share many characteristics in common and are both based on the same concept: unsuspecting individuals are duped by unscrupulous investors who promise them extraordinary returns in exchange for their investment capital. The difference between these types of schemes and regular investments is that, in contrast to regular investments, they can only provide consistent “profits” for as long as the number of investors continues to grow. 

When the number starts to fade away, so does the money. Ponzi and pyramid schemes are self-sustaining for as long as the cash outflows can be offset by monetary inflows, which is the case in most cases. Despite the fundamental differences in the types of products that schemers offer to their clients and the structure of the two ploys, both can be devastating if they are not properly executed.

Unscrupulous investors take advantage of unsuspecting individuals through the use of pyramid schemes and Ponzi schemes, which promise them extraordinary returns in exchange for their money. Ponzi schemes are financial schemes in which investors give money to a portfolio manager in exchange for interest. When the investors request their money back, they are reimbursed using the funds that have been contributed by subsequent investors. 

To start a pyramid scheme, an investor must first find and recruit other investors, who in turn must recruit more investors and so on. Late-arriving investors make a payment to the person who recruited them in exchange for the right to participate in the venture or, in some cases, to sell a specific product. Investing in a Ponzi scheme is a type of investment fraud in which existing investors are paid from funds collected from new investors.

what is pyramid

Ponzi scheme organizers frequently promise to invest your money and generate high returns with little or no risk on your part, which is not always true. However, in many Ponzi schemes, the fraudsters do not actually invest the money they receive. Instead, they use it to pay those who made earlier investments, with some remaining for their own use. Ponzi schemes, which generate little or no legitimate earnings, rely on a constant inflow of new money to stay afloat. When it becomes difficult to attract new investors or when a large number of existing investors withdraw their funds, these schemes are more likely to fail. 

Charles Ponzi is the man who defrauded investors in the 1920s with a postage stamp speculation scheme, and Ponzi schemes are named after him. A number of Ponzi schemes have characteristics in common. Several warning signs and red flags should be taken into account when considering Ponzi schemes.

scam

Returns that are high while posing little or no risk Every investment entails some level of risk, and investments that generate higher returns typically entail a greater degree of risk. Any investment opportunity that promises a profit should be treated with extreme caution. Returns that are excessively consistent. Investments have a tendency to fluctuate in value over time. If an investment consistently generates positive returns regardless of overall market conditions, it is prudent to be skeptical of it. Unregistered investments are those that are not registered with the government. 

Ponzi schemes are typically investments that are not registered with the Securities and Exchange Commission (SEC) or with state regulators. Investment information about the company’s management, products, services, and finances is made available to investors through the registration process, which is essential—sellers who are not licensed.

Investment professionals and firms must be licensed or registered under federal and state securities laws in order to conduct business. The majority of Ponzi schemes are perpetrated by unlicensed individuals or unregistered businesses. Strategies that are both secretive and complex. Investments should be avoided if you do not understand them or if you cannot obtain complete information about them. There are problems with the paperwork. 

Account statement errors could be a sign that funds are not being invested in the manner in which they were promised. Receiving payments has proven to be difficult. If you don’t receive a payment or are having trouble cashing out, you should be suspicious. Ponzi scheme promoters may attempt to deter participants from cashing out by offering even higher returns in exchange for remaining in the scheme.

pyramid

The Ponzi scheme, which is similar to a pyramid scheme, generates returns for older investors by attracting new investors who are promised a large profit with little or no risk. For both fraudulent schemes, the underlying assumption is that the new investors’ funds will be used to reimburse the original investors. The companies that participate in a Ponzi scheme devote all of their resources to attracting new clients who will invest their money.

History and background of the very first Ponzi Scheme known to man

The term “Ponzi Scheme” was coined in 1920 in honor of a swindler by the name of Charles Ponzi. But the first documented instances of this type of investment scam can be traced back to the mid-to-late-1800s when Adele Spitzeder of Germany and Sarah Howe of the United States orchestrated schemes that defrauded investors of their money. 

According to Charles Dickens, the methods of what would become known as the Ponzi Scheme was described in two separate novels, Martin Chuzzlewit (1844) and Little Dorrit (1857), both of which were published in the same year. The United States Postal Service was the focus of Charles Ponzi’s first scheme, which began in 1919. At the time, the postal service had developed international reply coupons, which allowed a sender to pre-purchase postage and include it with their correspondence.

Ponzi Schemes

After receiving the coupon, the recipient would take it to a local post office and exchange it for the priority airmail postage stamps that would be required to send a response. Arbitrage is the term used to describe this type of exchange, which is not considered to be illegal. 

Ponzi, on the other hand, became greedy and increased the scope of his operations. Under the name of his company, Securities Exchange Company, he promised returns of 50% in 45 days or 100% in 90 days if the investment was made. Following his success with the postage stamp scheme, investors were immediately attracted to his business venture.

Ponzi did not actually invest the money; instead, he simply redistributed it among his investors and claimed that they had made a profit. The Securities Exchange Company was investigated by The Boston Post in August of 1920, after which the scheme was discovered and shut down. Ponzi was arrested by federal authorities on August 12, 1920, as a result of the newspaper’s investigation. He was charged with several counts of mail fraud and sentenced to prison. The concept of a Ponzi scheme did not die out in 1920, as some believe. As technology progressed, the Ponzi scheme evolved as well.

When Bernard Madoff was convicted of running a Ponzi scheme in 2008, it was revealed that he had falsified trading reports in order to show that clients were making money on investments that did not exist.On April 14, 2021, Madoff passed away in prison. 

The following characteristics are common to all Ponzi schemes, regardless of the technology employed: a guaranteed promise of high returns with little risk, a consistent flow of returns regardless of market conditions, investments that have not been registered with the Securities and Exchange Commission (SEC), investment strategies that are secret or described as too complex to explain, clients who are not permitted to view official paperwork for their investment, and clients who are subjected to difficult financial situations (such as bankruptcy).

Based on fraudulent investment management services

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It is based on fraudulent investment management services. Basically, investors contribute money to the “portfolio manager,” who promises them a high return, and then when those investors want their money back, they are paid out with the incoming funds contributed by subsequent investors. These types of fraud are organized by individuals who are responsible for overseeing the entire operation; they merely transfer funds from one client to another without engaging in any genuine investment activities. 

In more than a decade, Bernard Madoff orchestrated the most famous Ponzi scheme in recent history—as well as the single largest fraud against investors in the United States. Madoff defrauded investors through Bernard L. Madoff Investment Securities LLC, which he owned at the time. Madoff amassed a large network of investors from which he was able to raise funds by pooling the funds of his nearly 5,000 clients into a single account, which he then withdrew from.

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He never actually invested the money, and once the financial crisis of 2008 took hold, he was no longer able to continue the fraud on the public. The Securities and Exchange Commission estimates that investors have suffered a total loss of approximately $65 billion. The controversy sparked a period known as Ponzi Mania in late 2008, during which regulators and investment professionals were on the lookout for additional Ponzi schemes. 

An alternative to this is a pyramid scheme, which is structured so that the initial schemer must recruit other investors who will, in turn, recruit additional investors. Those investors will, in turn, recruit even more investors, and so on. In some cases, a financial incentive will be presented as an investment opportunity, such as the right to sell a specific product or service.

Each investor makes a payment to the individual who recruited them for the opportunity to sell this item. The recipient is required to distribute the proceeds to those at the higher levels of the pyramid structure in order for the pyramid to work. 

One significant distinction is that pyramid schemes are more difficult to prove than Ponzi schemes. A second reason is that they are better protected is that the legal teams behind corporations are far more powerful than the legal teams protecting an individual. Herbalife, a nutritional company, was accused of running one of the largest pyramid schemes in the world (HLF). Despite the fact that they were labeled an illegal pyramid scheme and had to pay out more than $200 million in damages, their products continue to sell, and their stock price appears to be in good shape.

losing money

Ponzi schemes, in their most common form, require an initial investment and promise returns that are above average. Rather than specifying their income strategy, they use vague verbal guises such as “hedge futures trading,” “high-yield investment programs,” or “offshore investment” to describe it. 

The operator frequently takes advantage of a lack of investor knowledge or the competence and sometimes claims to be employing a proprietary, secret investment strategy in order to avoid disclosing details of the scheme to potential investors. In its most basic form, a Ponzi scheme is defined as “robbing Peter to pay Paul.” Initially, the operator offers high returns in order to attract new investors and persuade existing investors to make additional investments. 

When additional investors begin to participate, a cascade effect begins to take place. Instead of paying genuine profits to investors, the schemer pays a “return” to the original investors from the investments of new participants.

Operators cheat the system

lock hacking

A high rate of return often encourages investors to leave their money in the scheme, resulting in the operator not having to pay out a large amount of money to the investors. As a result, the operator simply sends statements stating how much money they have earned, which helps to maintain the illusion that the scheme is a high-yield investment opportunity. 

A Ponzi scheme’s investors may encounter difficulties when attempting to withdraw their funds from the scheme. As a result, operators are attempting to reduce withdrawals by offering new investment plans to investors. Money can only be withdrawn after a specified period of time in exchange for higher returns. Due to the inability of investors to transfer money, the operator sees new cash flows.

If a small number of investors do wish to withdraw their money in accordance with the terms permitted, their requests are typically processed promptly, giving the impression to all other investors that the fund is solvent and financially sound.Ponzi schemes can start out as legitimate investment vehicles, such as hedge funds. Still, they can quickly devolve into a Ponzi-type scheme if they suffer unexpected losses or fail to generate the legitimate returns that investors expect. Instead of admitting that they have failed to meet expectations, the operators fabricate false tax returns or produce fraudulent audit reports, and the operation is classified as a Ponzi scheme.

men on computer

These schemes are built on the foundation of a diverse range of investment vehicles and strategies, most of which are legitimate in their own right. For example, Allen Stanford defrauded tens of thousands of people by using bank certificates of deposit as a means of payment. 

In most cases, certificates of deposit are low-risk and insured instruments; however, the certificates of deposit issued by Stanford University were fraudulent. At the very least, it is theoretically possible for certain Ponzi schemes to ultimately “succeed” financially, provided that the promoters did not intend to operate a Ponzi scheme in the first place. For example, a failing hedge fund that has reported fraudulent returns may be able to “make good” on its reported numbers by making a successful high-risk investment, such as a real estate investment.

Furthermore, if the operators of such a scheme are faced with the prospect of an impending collapse accompanied by criminal charges, they may perceive little additional “risk” to themselves in attempting to cover their tracks by engaging in additional illegal acts to try and make up for the shortfall that has been identified (for example, by engaging in insider trading). 

Due to the fact that hedge funds are regulated and monitored less heavily than other investment vehicles such as mutual funds, any fraudulent content in reports is often difficult to detect unless and until the investment vehicles ultimately collapse. In the absence of a whistle-blower or accompanying illegal acts, any fraudulent content in reports is often difficult to detect until and unless the investment vehicles ultimately collapse.

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Poof! The operator vanishes

goodbye

Ponzi schemes typically fail because of one or more of the following factors, even if they are not stopped by authorities. The operator vanishes with all of the remaining investment money in his possession. Promoters who intend to flee the country frequently attempt to do so just as the returns due to be paid are about to exceed the number of new investments because this is the time when the amount of investment capital available will be at its greatest. 

Because the scheme necessitates a continuous stream of investments in order to fund higher returns if the number of new investors declines, the scheme will collapse as the operator will be unable to meet the promises made to investors (the higher the returns, the greater the risk of the Ponzi scheme collapsing).

When there is a liquidity crisis, it is common for panic to erupt as more people begin to ask for their money, much like a bank run. Because they frequently cause many investors to attempt to withdraw part or all of their funds sooner than they had intended, external market forces, such as a sharp decline in the economy, can often hasten the collapse of a Ponzi scheme (for example, the Madoff investment scandal during the market downturn of 2008). 

Some of the factors listed above may be present in combination with one another. If news of a police investigation into a Ponzi scheme spreads, investors may demand their money immediately, prompting the promoters to flee the jurisdiction sooner than planned (assuming they intended to abscond in the first place eventually), causing the scheme to collapse much more quickly than it would have otherwise if the police investigation had been allowed to run its course, resulting in the scheme being shut down much more quickly than it would have been if the police investigation had been allowed to run its course.

Actual losses are exceedingly difficult to calculate with any accuracy. The sums of money that investors believed they had were never actually attainable in the first instance. Because of the large difference between “money in” and “fictitious gains,” it is virtually impossible to determine how much money was lost in a Ponzi scheme. 

A pyramid scheme is a type of fraud that is similar to a Ponzi scheme in that it is based on an erroneous belief in a non-existent financial reality, as well as the expectation of receiving an extremely high rate of return. However, these schemes differ from Ponzi schemes in a number of ways, including the following: The schemer serves as the “hub” for all of the victims, interacting with each and every one of them on an individual basis. In a pyramid scheme, those who recruit new participants receive a direct financial benefit from the scheme.

In most cases, failure to recruit results in a loss of investment return. A Ponzi scheme makes the claim that it is based on some esoteric investment approach and thus attracts wealthy investors. In contrast, a pyramid scheme makes the explicit claim that new money will be used to pay out the profits made on the initial investments made. 

A pyramid scheme typically collapses much more quickly than other types of schemes because it requires exponential increases in participants in order to remain viable. Ponzi schemes, on the other hand, can survive (at least in the short term) simply by persuading the vast majority of existing participants to reinvest their money. In contrast, only a small number of new participants are recruited.

Ponzi schemes - the next generation

online future

Scammers attempting a new generation of Ponzi schemes have turned to cryptocurrency as a means of financing their operations. According to the Financial Times, one such method has been the misuse of initial coin offerings, or “ICOs,” which have been referred to as “smart Ponzis.” Because of the newness of initial coin offerings (ICOs), there is currently a lack of regulatory clarity on the classification of these financial instruments, giving scammers considerable latitude to develop Ponzi schemes based on these assets. 

Furthermore, the pseudonymity of cryptocurrency transactions makes it much more difficult to identify and bring legal action (whether civil or criminal) against those who engage in them. Economic bubbles are also similar to Ponzi schemes. One participant is paid by contributions from a subsequent participant until the bubble bursts, at which point it is inevitable that the economy will collapse.

A bubble is characterized by continuously rising prices in an open market (for example, stocks, real estate, cryptocurrency, tulip bulbs, or the Mississippi Company), where prices rise as a result of increased demand, and demand increases as a result of rising prices. Bubbles are frequently attributed to the “greater fool” theory of economics. As with the Ponzi scheme, the price of the item exceeds its intrinsic value; however, unlike the Ponzi scheme, the following is true: In the majority of economic bubbles, there is no single individual or group who is misrepresenting the intrinsic value of the asset. 

A common exception is a pump and dump scheme (typically involving buyers and sellers of thinly traded stocks), which, when compared to other types of bubbles, has a lot more in common with a Ponzi scheme than it does with the others.

danger ponzi

When authorities uncover a Ponzi scheme, they are typically subjected to criminal prosecution; however, with the exception of pump and dump schemes, economic bubbles are not typically associated with illegal activity or even bad faith on the part of any participants. 

Laws are only broken if someone intentionally and knowingly misrepresents facts in order to inflate the value of an item, which is not the case in most instances (as with a pump and dump scheme). Even when this occurs, the evidence of wrongdoing (and, in particular, criminal activity) in a court of law is frequently much more difficult to establish than in a Ponzi scheme. 

The collapse of a bubble economy therefore rarely results in criminal charges (which require proof beyond a reasonable doubt to be successful) and, when charges are brought, they are frequently brought against corporations rather than individuals, which can be easier to bring in court than charges against individuals but can also result in fines instead of jail time. In situations where someone suspects that an economic bubble is the result of nefarious activity, the most commonly pursued legal remedy is to sue for damages in civil court, where the standard of proof is only a preponderance of the evidence (balance of probabilities).

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The "innocent" beneficiaries are liable to repay

Following the collapse of a Ponzi scheme, in some jurisdictions, even the “innocent” beneficiaries are liable to repay any profits made by the scheme’s operators for the benefit of the victims. This includes anyone who unwittingly profited from the scheme without being aware of its fraudulent nature, as well as charitable organizations to which perpetrators frequently give relatively generously while a scheme is in operation in an effort to raise their own profile and thereby “profit” from the positive media coverage that results from the scheme’s success. 

The opposite is usually true in the case of an economic bubble, especially if there is no evidence that the bubble was caused by anyone acting in bad faith. Furthermore, a person whose own participation in an economic bubble is not particularly noteworthy is unlikely to increase participation in the bubble and thus personally profit by donating to charity. In an economic bubble, items traded on the open market are much more likely to have an intrinsic value that is worth a significant portion of the market price.

Consequently, following the collapse of an economic bubble (particularly one in a commodity such as real estate), the items affected will frequently retain some value, whereas an investment that is part of a Ponzi scheme will typically be worthless (or very close to worthless). On the other hand, obtaining financing for many of the items that are frequently the subject of bubbles is much easier these days. 

An investor who is trading on margin or borrowing to finance investments may still suffer a total (or very substantial portion) of their investment capital, or even be liable for losses in excess of the original capital investment when the market is experiencing a bubble. It is similar to an exit scam when a Ponzi scheme eventually comes to an end with the operator fleeing the country. 

The most significant distinction is that an exit scam does not involve any type of investment vehicle with the associated promise of profits and returns. As an alternative, exit scammers either accept payment for goods that they never deliver (usually after building a reputation for reliably delivering goods) or steal funds that have been placed in escrow on behalf of others (the latter often involves the operators of illegal darknet markets that facilitate the sale of illicit goods and services).

Real Estate Investment Fraud

house purchase

When you fall for an investment scam, you are enticed by promises of teaching you how to make a lot of money quickly, easily, and with little risk — usually by investing in the financial or real estate markets. Scammers will sometimes begin with a free seminar before charging you a hefty fee for their “proven” investment strategies. 

The real tricks, however, are the lies that they tell you. An investment coaching scam is one in which the scammer claims that their “patented” strategy (or something similar) will teach you how to make money investing in stocks, bonds, foreign currency, or tax liens (or something similar). They claim that their investment strategy will prepare you for the rest of your life — and even allow you to stop working. They attract your attention with infomercials or online advertisements, which encourage you to attend free events or watch free introductory videos to learn more about their products.

Later on, however, you discover that you must pay a hefty fee in order to receive the coaching they promise. They’ll show you examples of people who have achieved success through their coaching program. However, you have no way of knowing whether or not their stories are true. The promise of making quick money through real estate investments continues to entice people to make these types of investments. 

Real estate investment scams are a common snare for unsuspecting investors. The National Association of Securities Dealers (NASD) warns investors about real estate investment seminars, particularly those that are aggressively promoted as an alternative to more traditional retirement planning strategies involving stocks, bonds, and mutual funds. Some of the testimonials from people who claim to have doubled or tripled their income through seemingly simple real estate investments may be shared with the audience at these seminars.

real state

However, it is possible that these assertions are nothing more than hyperbole. Two of the most popular investment pitches involve so-called “hard-money lending” and “property flipping,” which are both types of real estate investing. 

In the real estate industry, hard money lending is a term that refers to real estate investments that are financed by means other than traditional bank borrowing. (The term “hard to get” refers to the fact that this type of loan would be “hard to get” from a traditional lending source.) As a result of the high-interest rates that can be charged on hard-money loans, some businesses or wealthy individuals specialize in providing these loans. Nevertheless, borrowers may attempt to obtain such loans from retail investors as well.

By participating in a hard-money loan, investors may be enticed to forego the opportunity to earn higher rates of return, and they may (or may not) be aware of the risks involved, which may include concerns about the borrower’s credit, the expected stability of income from the investment, and time constraints. In a hard-money transaction, there are three parties involved: the investor, the lender, and the borrower (or debtor). 

In order to lend to borrowers, private lenders must raise money from investors. In the event that funds from multiple investors are pooled together, the investment vehicle used to purchase the property is referred to as a “pooled investment,” which is a security and, as such, is subject to the protection and disclosure requirements of securities legislation and regulations. In contrast to traditional loans, which are based on the borrower’s ability to repay the loan using indicators such as credit scores and income, hard-money loans are based on the value of the property with which they are secured, which the borrower either already owns or is acquiring with the loan.

contact signing

If the borrower fails to repay the loan, the lender may be able to seize the asset and attempt to sell it; however, depending on how the loan is structured, it may be more difficult for the investor to recover the loan. Flipping real estate is the practice of acquiring distressed property, renovating it, and then immediately reselling it in the hopes of profiting from the transaction. A property flipper can finance the flip with their own money or by obtaining financing from other sources. 

The practice of property flipping, which is financed by borrowed funds or outside investments, can be done entirely legally. Still, it can also be a source of fraud for unscrupulous individuals. In the case of a property flip, a scammer may attempt to defraud potential investors by misrepresenting the value of the underlying property or the expected profit potential on the transaction.

As an alternative, scammers may attempt to misappropriate borrowed or invested funds or use unwitting investors as “straw buyers” with outside banks or mortgage lenders, leveraging their victims’ identities and credit histories in order to make the fraud more difficult to detect and prosecute. Real estate is becoming an increasingly popular area of investment, but it is not without its risks in terms of legal pitfalls. Charges of real estate investment fraud can be complicated, especially when federal authorities are involved in the prosecution of the crimes. 

Someone who intentionally misrepresents themselves while investing in or attempting to invest in real estate may face federal prosecution for real estate investment fraud if they do so with knowledge of the truth. For example: if an individual or company makes false statements on a loan application, this may be considered fraud.

counting dollars

This type of real estate investment fraud could pose a problem for either the individual or the mortgage broker involved. In the event that the individual submits false information to obtain a loan, the mortgage broker runs the risk of being sued for fraud and for perpetuating the fraud by submitting a loan application that contains the information they were aware was false. Aside from that, individuals or businesses that are soliciting investments in real estate schemes may be liable for fraud if the solicitation contains elements that are intentionally misleading. 

Take, for example, the case of a company that misrepresents the status of an investment property and then continues to solicit investments on the basis of false promises of monetary reward. On top of that, auctions for foreclosures can also be a source of legal risk for those who participate in them.

If there is a public foreclosure auction and the bids are rigged or attempted to be rigged, this could be considered a type of fraud that could be prosecuted as an antitrust violation under the Sherman Antitrust Act. In the United States, we have been conditioned to believe that the real estate market is always on the rise. The result is that real estate investing may become an important component of any well-diversified portfolio. Flipping houses, purchasing distressed properties, and becoming a landlord, on the other hand, are not for everyone. 

People who are not prepared for a bad real estate investment could end up losing their shirts. They have bad tenants, underestimate the costs of rehabbing a home, or overestimate their return on investment when trying to sell a home, and as a result, they lose their investment.

Pay Debt

Furthermore, if they make a bad decision, they may find themselves in debt. Making a living in real estate is not limited to purchasing and flipping properties. Be on the lookout if your financial advisor asks you to participate in financing real estate transactions that do not involve traditional banking institutions. This type of lending is referred to as “hard-money lending.” The goal of a hard-money lender is to lend money to real estate speculators so that the lender can make a large profit in a short period of time. If the buyer fails to pay the purchase price, your only option is to seize the property. It’s possible that the property you lent money for will not be worth the money you loaned if it even exists.

Predatory Lending

Predatory lending is generally defined as the practice of imposing unfair, deceptive, or abusive loan terms on borrowers without their consent. In many cases, these loans are accompanied by high fees and interest rates, deplete the borrower’s equity, or place a creditworthy borrower in a lower credit-rated (and therefore more expensive) loan, all to the benefit of the lending institution. 

Predatory lenders frequently employ aggressive sales tactics in order to take advantage of borrowers’ lack of understanding of financial transactions in order to gain their business. They entice, induce, and assist a borrower into taking out a loan that they are not reasonably capable of repaying. They do this through deceptive or fraudulent actions, as well as a lack of transparency on their part. Predatory lending is defined as any lending practice that imposes unfair and abusive loan terms on borrowers, such as high-interest rates, high fees, and loan terms that deprive the borrower of their own equity.

LOAN

Loans from predatory lenders are frequently obtained through aggressive sales tactics and deception, resulting in borrowers taking out loans that they cannot afford. It is common for them to prey on vulnerable populations, such as those who are unable to meet their monthly expenses; those who have recently lost their jobs; and those who are denied access to a broader range of credit options for illegal reasons, such as discrimination based on their lack of educational background or their advanced years of age. 

Predatory lending has a disproportionate impact on women, African-Americans, and Latino communities. Predatory lending refers to any unethical practices used by lenders to entice, induce, mislead, and assist borrowers into taking out loans that they are unable to pay back in a reasonable amount of time or that they must pay back at a rate that is significantly higher than the current market rate.

The circumstances of borrowers, as well as their lack of knowledge, are exploited by predatory lenders. In the case of a loan shark, for example, the archetypal example of a predatory lender—someone who lends money at an extremely high-interest rate and may even use violence to collect on their debts—is someone who is a predatory lender. 

The vast majority of predatory lending, on the other hand, is carried out by more established institutions such as banks and finance companies, as well as mortgage brokers, attorneys, and real estate developers. Many borrowers are put at risk as a result of predatory lending. People with insufficient income who have regular and urgent needs for cash to make ends meet are typical targets, as are those with poor credit scores, those with less education, and those who are subjected to discriminatory lending practices because of their race or ethnicity other things.

dollar on fire

Predatory lenders frequently target communities where there are few other credit options available, making it more difficult for borrowers to compare rates and terms. They entice customers with aggressive sales tactics through the mail, phone, television, radio, and even door-to-door sales, and they generally employ a variety of unfair and deceptive business practices in order to make a profit. Predatory lending is intended to benefit the lender above all else, and it is illegal. It does not take into consideration or interfere with the borrower’s ability to repay a debt. 

Lending tactics are frequently deceptive, and they attempt to take advantage of a borrower’s lack of understanding of financial terms and the rules that govern loan transactions. These strategies can include those identified by the Federal Deposit Insurance Corporation (FDIC), as well as a number of others, including those mentioned below.

Exceedingly burdensome and exploitative fees: these are frequently concealed or downplayed because they are not included in the interest rate of a loan. According to the Federal Deposit Insurance Corporation (FDIC), fees totaling more than 5 percent of the loan amount are not uncommon. Another example is the use of excessive prepayment penalties. 

A balloon payment is a single, extremely large payment made at the end of a loan’s term that is frequently used by predatory lenders to make your monthly payment appear low. Because of this, it is possible that you will not be able to afford the balloon payment and will be forced to refinance, incurring additional costs or default. Loan flipping is when a lender forces a borrower to refinance over and over again, generating fees and points for the lender at each stage of the transaction. As a result, a borrower may find themself trapped by an ever-increasing debt burden.

calcu and money

Asset-based lending and equity stripping are terms used to describe when a lender grants a loan based on an asset, such as a home or a car, rather than on your ability to pay back the debt. If you fall behind on your mortgage or car payments, you run the risk of losing your home or vehicle. Affluent older adults on fixed incomes who have a lot of equity but little cash may be targeted with loans (for example, for a house repair) that they will have difficulty repaying, and that will jeopardize their equity in their home. 

Add-on products or services that aren’t absolutely necessary, such as single-premium life insurance for a mortgage. Steering refers to when lenders steer borrowers into costly subprime loans, even when their credit histories and other factors qualify them for more favorable prime loan terms. It is illegal to practice reverse redlining. Redlining was a racist housing policy that effectively barred Black families from obtaining mortgages until the Fair Housing Act of 1968 made it illegal. 

Redlined neighborhoods, on the other hand, continue to be dominated by Black and Latino residents. Furthermore, in a form of reverse redlining, they are frequently targeted by predatory and subprime lending institutions.

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Most Common Predatory Loans

1. Subprime Mortgages
mortgage

Home mortgages are the focal point of traditional predatory lending. Home loans are secured by the borrower’s real estate, which allows predatory lenders to profit not only from loan terms that are stacked in their favor, but also from the sale of a foreclosed home if the borrower defaults. Subprime loans are not necessarily predatory in nature. Banks would argue that their higher interest rates are a reflection of the higher risk associated with lending to consumers who have poor credit. 

However, even in the absence of deceptive practices, a subprime loan is more risky for borrowers due to the significant financial burden it represents. With the rapid expansion of subprime lending came the possibility of predatory lending practices becoming more prevalent. Homes with subprime mortgages were particularly vulnerable when the housing market collapsed and a foreclosure crisis triggered the Great Recession in the United States. Subprime loans grew to account for a disproportionate share of residential foreclosures in the United States.

2. Payday Loans
payday

The payday loan industry lends billions of dollars each year in small-dollar, high-cost loans to people who need a loan to get them through until their next payday. Annual percentage rates (APR) on these loans typically range from 390 % to 780 %, with terms typically lasting two weeks. Payday lenders operate online and through storefronts primarily in economically underserved neighborhoods, with a disproportionate number of Black and Latinx customers. Despite the fact that the federal Truth in Lending Act (TILA) requires payday lenders to disclose their finance charges, many people fail to consider the additional costs of borrowing money. 

The majority of loans are for 30 days or less and are intended to assist borrowers in meeting short-term obligations. The loan amounts on these loans are typically between $100 and $1,000, with $500 being the most common amount. Loans can usually be rolled over without incurring additional finance charges, and many borrowers—as many as 80% of them—become repeat customers as a result of their experience. With new fees being added to a payday loan every time it is refinanced, it is easy for debt to spiral out of control. According to a study conducted in 2019, using payday loans increases the likelihood of filing for personal bankruptcy by twofold.

3. Auto-title Loans
auto loan

These are one-time-payment loans based on a percentage of the value of your vehicle. They are associated with high-interest rates, as well as the requirement to surrender the vehicle’s title and a spare set of keys as security. For the approximately one in every five borrowers who have their vehicle seized because they are unable to repay the loan, this results in not only a financial loss, but can also jeopardize a family’s ability to access jobs and childcare.

Social Media/Internet Investment Fraud

Social media platforms such as Facebook, YouTube, Twitter, and LinkedIn have emerged as essential tools for investors in the United States. Investors turn to social media for a variety of reasons, including research on specific stocks, background information on a broker-dealer or investment adviser, guidance on an overall investment strategy, up-to-date news, or simply to discuss the markets with others. It also has a number of features that criminals may find appealing in addition to its other benefits. 

Fraudsters can use social media to their advantage in their attempts to appear legitimate, to remain anonymous, and to reach a large number of people at a low cost. An increasing number of investors are turning to the Internet and social media to assist them in making investment decisions. In addition to providing numerous benefits to investors, these online tools also serve as attractive targets for cybercriminals due to their accessibility.

social media

In general, criminals are quick to adapt to new technologies – and the Internet is no exception in this regard. The Internet is a useful tool for reaching a large number of people without having to spend a lot of time or money. Large numbers of people can be reached with minimal effort through a website, an online message, or a social media site. It is relatively simple for fraudsters to make their messages appear genuine and credible, and it can be difficult for investors to distinguish between fact and fiction in some cases. 

Whenever an investment promotion piques your interest, do some preliminary research on the “opportunity” before providing your contact information (phone number and email address). It’s possible that doing so will put you at risk of becoming a victim of investment fraud. Becoming an educated investor on social media sites or elsewhere on the Internet is essential for avoiding investment fraud.

While legitimate online newsletters provide valuable information, others are used to perpetrate fraud against their subscribers. Some companies pay online newsletters to “tout” or recommend their stocks, and these newsletters are known as “routers.” Touting is not against the law as long as the newsletters include information about who paid them, how much they were paid, and the form of payment, which is usually cash or stock. 

Fraudsters, on the other hand, frequently exaggerate the amount of money they receive and their track record. Despite the fact that they stand to profit from convincing others to buy or sell certain stocks, fraudulent promoters may make claims in newsletters that they are providing independent, unbiased recommendations. They may disseminate false information in order to promote stocks that are worthless.

business

In spite of the fact that these so-called “newsletters” may be advertised on legitimate websites, such as on the online financial pages of news organizations, this does not rule out the possibility that they are fraudulent. Investors can exchange information through online bulletin boards, chat rooms, and social media sites, among other methods. While some messages may be genuine, many others are untrue – and in some cases, scams – in nature. 

The use of online discussions can be used by fraudsters to inflate the value of a company or to pretend to reveal “inside” information about upcoming announcements, new products, or lucrative contracts. It’s impossible to know for certain who you’re dealing with or whether they’re trustworthy because many websites allow users to hide their identities behind a variety of different aliases.

It is possible that people who claim to be objective observers are actually insiders, large shareholders, or paid promoters. A single individual can easily create the appearance of widespread interest in a small, thinly-traded stock by posting a large number of messages under a variety of aliases on various forums. 

Other online offerings may not be fraudulent in and of themselves, but they may fail to comply with the applicable registration requirements of the federal securities laws if they are not properly registered. While most solicitations or “offerings” are required to be registered under federal securities laws, some offerings are exempt from registration. Always check to see if a securities offering has been registered with the Securities and Exchange Commission (SEC) or a state, or if it is otherwise exempt from registration, before investing.

WORRIED THAT SOMEONE HAS YOUR PERSONAL & BUSINESS INFORMATION?

With how easy it is for scammers to acquire your data, it’s reasonable to be alarmed. Protect yourself and your loved ones by getting advice from experts. We will guide and even help you get your money back from scammers.

Spam, also known as unsolicited bulk e-mail, is frequently used to promote bogus investment schemes or to disseminate false information about a company. Spammers can send personalized messages to millions of people at once using a bulk email program, which is significantly less expensive than cold calling or sending traditional mail to each individual. 

The use of spam to reach potential victims is common in scams, including advance fee frauds. There are a variety of fraudulent activities that take place on social media that are not exclusive to the Internet. “Pump and dump” schemes, promises of “guaranteed returns,” “High Yield Investment Programs,” and affinity fraud are all examples of financial fraud.

CHAPTER 4: Two Salient Blacklisted Investment Firms to Avoid

WorldCom (2002)

worldcom

Not long after the collapse of Enron, the stock market was rocked by another billion-dollar accounting scandal, this time involving a multinational corporation. The telecommunications behemoth WorldCom was subjected to intense scrutiny after yet another instance of serious “book-cooking” was discovered. Operating expenses were recorded as investments by WorldCom. According to reports, the company considered office pens, pencils, and paper to be an investment in the future of the company and, as a result, expensed (or capitalized) the cost of these items over a period of several years, rather than all at once. 

Approximately $3.8 billion in normal operating expenses, which were supposed to be recorded as expenses in the fiscal year in which they were incurred, were treated as investments and recorded over a number of years, resulting in a total loss of $3.8 billion. This small accounting trick resulted in a significant overstatement of profits for the year in which the expenses were incurred. WorldCom earned more than $1.3 billion in profits during the year 2001. In fact, the company’s operations were becoming increasingly unprofitable. 

Who has suffered the most as a result of this transaction? Employees were laid off in large numbers; tens of thousands of people lost their jobs. The investors were the next to be affected by the betrayal, as they were forced to witness the gut-wrenching decline in the value of WorldCom’s stock, which plummeted from more than $60 to less than $1.

Bernard Madoff (2008)

Bernie Madoff

Bernard Madoff, the former chairman of the Nasdaq and the founder of the market-making firm Bernard L. Madoff Investment Securities, was arrested on December 11, 2008, after his two sons turned him in for running a widespread Ponzi scheme, according to court documents. The then 70-year-old managed to conceal his hedge fund losses by compensating early investors with money raised from other sources. For the past 15 years, this fund has generated an average annual return of 11 percent. 

A proprietary option collar strategy, which was claimed to be the reason for the fund’s consistent returns, was used to reduce volatility, according to the fund’s alleged strategy, which was provided as justification. A total of approximately $50 billion was stolen from investors through this scheme. He was found guilty and sentenced to 150 years in prison. Madoff died in prison on April 14, 2021, at the age of 82.

Trading Scams & Investment Frauds Are Increasing by The Minute - Protect Your Funds!

In the wake of Bernard Madoff’s Ponzi scheme, we were left with the impression that the most common victims of investment fraud are large corporations or extremely wealthy individuals. Actually, fraud comes in many shapes and sizes, and it can affect any type of investor. Keep an eye out for any suspicious inconsistencies that may be hidden behind complicated jargon. A sound investment strategy should be logical in nature. Insist that your investment professional avoid using jargon that is unfamiliar to you. Examine the adviser’s claims about his or her performance in comparison to commonly available benchmarks. Are these results credible in any way? The excessive consistency of reported performance should have raised a red flag in the Madoff investigation. Examine how often and by whom the firm’s performance figures are independently audited. You can also look into how and whether the firm complies with the Global Investment Performance Standards, which are a widely accepted set of standards for calculating and reporting investment results.

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