The types of investment fraud seen online mirror the frauds perpetrated over the phone or through the mail.
Here are the most common investment schemes and the "red flags" one should watch for:
The pump and dump scam
It's common to see messages posted on the Internet that urge readers to buy a stock quickly or to sell before the price goes down. Cold callers often call using the same sort of pitch.
Often the promoters will claim to have "inside" information about an impending development or an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors.
Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company.
Ponzi and pyramid schemes
These investment scams are essentially robbing one person to pay another. Initial investors are paid off with money taken from new investors. As long as a steady flow of new investors keeps coming in, there will be money to pay off the old investors. This early return on investment is misleading, however, because when the new investors stop coming in, the scheme collapses, investors lose their money, and the fraudsters walk away rich.
Affinity fraud describes investment schemes that prey upon members of identifiable groups, including religious communities, the elderly, ethnic groups, and professionals such as lawyers, doctors, or teachers.
Fraudsters often exploit the sense of trust and friendship in groups of people who have something in common. Fraudsters assume that the tight-knit structure of many groups makes it less likely that a scam will be detected by regulators and law enforcement officials and that victims may be more likely to forgive "one of their own."
They'll enlist respected leaders within a community to spread the word about an investment deal. The key to avoid being a victim in an affinity scheme is to ask questions and check out everything —no matter how trustworthy the person is who brings the investment opportunity to attention.
Oil and gas scams
If you think you've found the right oil or gas investment to "strike it rich," consider this: it may be a scam.
While some oil and gas investment opportunities are legitimate, many oil and gas ventures are frauds. Many of these schemes start in so-called "boiler rooms," where skilled telemarketers use high pressure sales tactics to convince potential investors to hand over their hard-earned money. Oil and gas scams typically increase after highly publicized news item, like volatile gas prices, to lure potential investors and make their "opportunity" sound more legitimate.
A promissory note is a form of debt — similar to a loan or an IOU — that a company may issue to raise money.
Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on the investment. While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. Investors should be careful to determine their legitimacy and should seek the advice of an objective third party when in doubt.
Prime bank fraud
In a prime bank scheme, fraudsters often claim investors' funds will be used to purchase and trade "prime bank" financial instruments or other "high yield investment programs" on clandestine overseas markets in order to generate huge returns in which the investor will share.
However, neither these instruments, nor the markets on which they allegedly trade, exist. To give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers.
Estate planning fraud
Another common scam involves estate planning — planning for disposition of assets after a death — and financial services.
Scam artists involved in this type of fraud and deceit usually meet the consumer at a meeting site or during an in-home visit. They pose as business people offering a variety of services, including help with estate planning. There are a wide variety of tools available to help with planning, but a popular tool for scam artists to push is a living trust.
When developed properly, by professionals such as attorneys, a living trust can be an excellent tool for estate planning needs. A living trust is created while a person is alive, and allows the person to control the distribution of the estate. The person transfers ownership of their property and their assets into the trust. Then the trustee — the person or institution that controls the trust — will distribute the assets upon the person’s death.
Assets placed in the living trust are not subject to probate, and this can save time and money when settling the estate. It is important to remember that a living trust might not be the best planning tool for every estate. Poorly executed living trusts can cost money and may not carry out intentions.
Some scams try to sell services to create a living trust and use this as a tool to access personal information. Once they have a person’s financial information, they may try to sell them additional products or services, including insurance annuities. These may look like lucrative investments, but one should evaluate the situation and decide what is best for the family.
Often a different type of estate planning or investment will be better investment vehicle, depending on the circumstances. It is very important that a person knows who they are dealing with, that they get referrals, and that they thoroughly investigate the business reputation of those attempting to sell them financial investment and/or estate planning services.
Farm and ranch fraud
Fraudulent and deceitful practices aren't limited to mail and Internet schemes or selling faulty estate planning services. With the cost of inputs rising, it is harder to make ends meet on the farm or ranch.
Some fraudulent schemes involve lying to investors about the number of cattle on feedlots and conspiring to set the prices of cattle at auctions. There are federal laws that prohibit these types of activities, including the Packers and Stockyards Act. It is important to know those that one does business with and make sure they have sound business practices.
Other offers to be wary of include lucrative leases for oil and gas, offers to purchase mineral or water rights, and offers to purchase carbon credits.
Owning property involves more than just owning real estate. One comparison that is frequently used is the bundle of sticks theory. This is the theory that a person’s property rights are like a bundle of sticks —that is, the property ownership is comprised of many separate rights: water rights, mineral rights, air rights, access rights and so on. Owners can give away or sell some of their rights while retaining the actual ownership of the property, or stated another way, owners can give away or sell some of the sticks, but they still have a bundle.
When signing a lease or any other document regarding one of the property rights, it is important to know and understand exactly what rights the owner is leasing. Often in oil and gas leases, there is language that allows the drilling company to access the ground water and to drill wherever they like. These are important considerations when signing a lease. It is imperative that when dealing with important rights associated with a real property that there is a qualified legal adviser thoroughly reviewing documents before the owner signs them, regardless of the royalty or lease bonus payments that are being offered.
High return or risk free investments
Some unscrupulous investment advisers make unsuitable recommendations to purchase investment products that don't meet the investment objectives or means of an investor.
Unsuitable recommendations might occur when a broker sells speculative investments such as options, futures or penny stocks to a 95-year-old widow living on a fixed income with a low risk tolerance. Investors should be careful to review the risk profile of each investment recommendation and should seek the advice of an objective third party when in doubt.
The Internet provides tremendous opportunities for sharing information and connecting with people from around the world. It also provides the perfect opportunity for scammers to take advantage of unsuspecting individuals. Some of the most prevalent schemes and fraud operations, either general consumer fraud or investor fraud, are taking place online.
Online scams sometimes ask for funds to be wired directly to the requester since there is little recourse for the victim once the money has been sent. Often these scams involve checks that appear to be valid, but are fake. It could take days for the depositing bank to discover the checks are fraudulent. By this time, any money that has been wired associated with the transaction may be spent and most likely not be recoverable.
Internet and mail fraud provide a way for scam artists to strike without you ever knowing who they are or seeing them face-to-face. Potential investors should also be very wary of business people that come to them making offers that seem too good to be true.