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Financial Scams

Financial Scams Team
UpdatedJun 9, 2014
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    6 min read
Key Takeaways:
  • Would you recognize a financial scam if someone tried to take advantage of you?
  • You don't have to be stupid to fall for scams. A surprising number of Americans have been scammed, according to a 2013 report.
  • Learn the 11 types of fraudulent offers, and 12 ways to detect if someone is trying to rip you off in an financial scam.

12 Red Flags of Financial Scams

Consumers receive a constant barrage of offers for financial scams. According to a 2013 FINRA Investor Education Foundation survey of 2,000 people, 84% had been solicited for financial scams. Most alarmingly, 16% of those who responded to the survey said they invested money in a fraudulent offer. Learn the 11 most common types of financial scams, and how to detect when someone is trying to commit a fraud at your expense.

The FINRA Investor Education Foundation report Financial Fraud And Fraud Susceptibility In The United States (PDF) discovered 11 common types of financial fraud. The top 11 were as follows.

E-mail Scam

These are so-called "419" frauds, which were made infamous by Nigerian scammers. This is a centuries old scam, where a the victim is contacted by a scam artist who is allegedly trying to smuggle the money from a wealthy Nigerian prince or corrupt oil company official out of the country. The offer promises a large payoff for the victim by splitting the bounty with the scam artist. To facilitate the transfer, the scam artist asks the victim to wire money to help bribe an official. The scam artist pockets the money and disappears. Two-thirds of the survey takers report receiving e-mail scam offers.

Educational Investment Seminars or Workshop Free Lunch

Almost as many survey takers reported receiving offers for a free lunch seminar, many for possible fraudulent investments. A recent joint report by the Securities and Exchange Commission, Financial Industry Regulatory Authority, and the North American Securities Administrators Association found that in all cases uncovered, the so-called workshops were sales pitches to seniors for annuities and investments promising 40% returns.

Lottery Scam

Lottery scams are another age-old fraud, and were reported by 36% of those surveyed. The scammer claims to be a processing agent for a lottery, who claims the recipient is the winner. To claim their prize, the victim must send the scammer an advance fee, which the scammer calls a processing fee or transfer charge. Once the victim wires the funds, the scammer disappears.

Penny Stock Scam

Penny stock scams are also called "pump and dump" scams. In a pump and dump scheme, a scammer-promoter will make false and outlandish praises about a low-cost stock, stating that it is a takeover target, or the owner of rights to a gold mine or oil deposit. As the gullible buy-in, the scammers sell stock they bought for almost nothing earlier. Once the scammers cash-out, the promoter stops touting the stock and its price collapses. About a third of those surveyed received penny-stock pitches.

Cold Call Investment Scam

That salesperson cold-calling you is not necessarily a scam artist. The hallmark of a cold call investment scam is the promise of a high, quick return at very low risk. When you decline, it is common for a cold caller to say, "Do you really want to walk away from a guaranteed X% return on your money?" Cold call scammers were reported by 1 in 4 respondents.

Multi-Level Marketing Scam

The most well-known multi-level marketing company (MLM) today is Herbalife. That company may or may not offer its clients a guaranteed income, but few would call it a scam. MLM scams offer the outward appearance of a Herbalife-like business opportunity, but are actually pyramid or Ponzi schemes. In a pyramid scheme, money from new investors is used to pay earlier investors. Pyramid scheme offers are reported by roughly 1 in 5.

Oil & Gas Scams

Oil & gas scams share a lot in common with penny-stock scams. Oil & gas scammers pick up on recent news of reserve discoveries, and then craft a sales pitch including a "can’t miss" well that will generate high rates of return. The caller usually promises the information is based on insider secrets, with a limited opportunity to get in on the riches. These scams are reported by 1 in 6 respondents.

Pre-IPO Scams

Buying and selling stock before a company’s initial public offering is legal. What's illegal is a scammer selling you worthless pieces of paper for either legitimate companies or "real" shares of non-existent companies. These scams are reported by 1 in 10 survey respondents.

High-Yield Investment Program (HYIP) Scam

A pyramid/Ponzi scheme that promises unbelievably and unsustainably high returns on investment. The scammers behind these use social media such as Facebook and Twitter to promote these scams to victims.

Promissory Note Scam

Promissory notes are an IOU, and are used by legitimate companies to raise money as an alternative to issuing stock. There is nothing wrong with promissory notes themselves. The problem is scam artists sell bogus promissory notes to unwitting investors. Consumers are almost never offered promissory notes, and instead are sold to institutional and other sophisticated investors.

Digital Currency Purchase Scam

Digital currencies, such as Bitcoin, is not scams in and of themselves. The problem lies with scammers who tout digital currency as an investment. If you want to speculate in the digital currency market, do so only with an amount you can afford to lose.

12 Ways to Recognize a Scam

Scammers try to bypass your skepticism by making promises that you would normally laugh at. According to the US. Securities and Exchange Commission, here are 12 red flags to watch for in fraudulent investments:

  • High-yield results
  • No way to lose
  • The investment outperforms the stock market
  • The investment will not earn less than an absurdly high return, such as 50%
  • Statements that "hundreds of people" have become extremely wealthy
  • A ground-floor opportunity
  • Time to decide is limited — you are told you must act now!
  • Advice is based on insider information
  • The seller is unlicensed or a convicted felon
  • Caller makes non-economic appeals
  • Endorsements from people like you
  • The investment seems too good to be true

When someone pitches you on any investment scheme, stop and do your homework. Ask tough questions — and demand answers — before you consider investing in anything. Make sure you understand how the investment works and what risks they pose. There is no risk-free investment. Anyone who claims you can’t lose is either lying or doesn’t understand what they are selling. In either case, you shouldn’t send money to either type of person.

What to Do If You are Scammed

File a complaint with the SEC Office of Investor Education and Advocacy. Then file a complaint with your state securities regulator. Be sure to file complaints promptly because there may be statute of limitations that apply. Then consult with a lawyer in your state who has consumer law experience to learn if you have a cause of action to file a lawsuit against the scammer for fraud.

Bills Action Plan

Scammers appeal to victims’ greed. If you feel like an opportunity presented to you is too good to be true, it probably is.

  1. Recognize 11 common types of scams
  2. Learn the 12 red flags that should alert you to a scam
  3. Contact authorities if you are the victim of a scam