Types of Investment Fraud

Fraudsters use different tactics to scam investors. While most of these approaches are old, new fraudulent schemes keep emerging, especially on the internet. Investors must be vigilant and conduct due diligence before transferring money or assets to any promoter, regardless of their relationship. This guide discusses the seven common types of investment fraud and tips on protecting your interests.

7 Common Types of Investment Fraud

There are several types of fraud in investment, including the following:

1. Ponzi Schemes and Pyramid Schemes

A Ponzi scheme pays returns to investors using their own money or money from new investors rather than a legitimate business profit. It’s named after a 20th-century swindler, Charles Ponzi, who orchestrated one of the biggest scams in history.

Ponzi schemes require a constant inflow of investments, so the promoter promises abnormally high returns and encourages investors to reinvest funds in the scheme. It typically fails when the participants run out of new investors or the government detects and stops it.

Ponzi and pyramid schemes are similar, but there are some technical differences. In Ponzi schemes, the promoter pays older investors with new investments, creating an illusion of successful investments. In pyramid schemes, the investor is encouraged to recruit new investors, who are also encouraged to recruit fresh investors, and so on. Investors from the bottom of the pyramid pay investors further up.

2. Promissory Note Schemes

A promissory note is a financial instrument containing a written promise that one party will pay another a specified amount within a predetermined period. Businesses use them to raise capital from non-bank sources, such as individuals and other companies, through loans. However, some fraudsters use promissory note schemes to dupe investors out of thousands of dollars. Here is how it works.

The promoter issues promissory notes as short-term loans to the target investor in exchange for promising unusually high returns at minimum risk. They claim the notes are guaranteed, insured, or asset-backed to persuade the investor. After receiving the money, the promoter may make initial payments to sway the investor to believe the scheme is legitimate. This attracts other investors and sometimes convinces the initial investor to reinvest. The scheme collapses as the promoter fails to maintain a consistent cash inflow.

3. Professional Embezzlement

Professional embezzlement occurs when fiduciaries with access to investment accounts or entrusted with managing investment portfolios misappropriate the funds or assets. Unscrupulous brokers, financial advisors, or portfolio managers sometimes execute unauthorized transactions or transfer assets to themselves without their client’s knowledge or consent. Some also falsify documents like trade confirmations, account statements, and reports to conceal fraudulent activities or use complex investment strategies to confuse and deceive clients.

4. Real Estate Investment Fraud

Investors can invest in real estate by providing loans to buyers or construction companies or purchasing shares in companies engaged in the real estate business. While real estate investment is generally a viable investment opportunity, investors must always take precautions.

Fraudsters aggressively promote illegitimate real estate schemes, promising high returns in a few years. Typically, the promoters ask investors to contribute to a pool of funds to purchase or develop a property with an inflated value or claim to own assets without proper documentation or disclosures.

Once the promoter receives the money, they acquire the property in their own name, denying the existence of any investment or flee because no legitimate business, project, or assets ever existed. Other promoters may also misrepresent the actual profit to the investors, keeping a portion for themselves.

5. Precious Metal Investment Scam

Investors invest in precious metals because of their tangibility, security, and likelihood of increase in value during market downturns. The challenge is that promoters sometimes use them as an opportunity to defraud investors.

Fraudsters may approach investors, claiming to be raising money to reopen a defunct mine. This enables them to acquire funds in the guise of purchasing equipment. Alternatively, the fraudster may represent the value of the precious metal in the mine to attract investors but underpay them and keep the rest of the profit.

In the most common example, fraudsters offer to sell precious metals like gold bullion and hold them in a secure vault for the investors. They promise to trade them when they grow in value, allowing the investor to make enormous profits. However, the promises fail to materialize because the promoter never had a previous metal or a legitimate business in the first place.

6. Cryptocurrency Fraud

Investing in crypto assets has generated interest from investors in the United States, allowing fraudsters to take advantage of such avenues. Knowing that crypto investment is largely unregulated and high-risk, fraudsters promise high, guaranteed returns with minimal risks to attract investors. They claim to place the money in a proprietary crypto asset trading platform to generate returns. When the investor transfers the money, the promoter stops communicating and transfers the money overseas.

Other fraudsters create fake initial coin offerings (ICOs) to scam investors. ICOs are fundraising events where new cryptocurrency ventures raise capital. Investors purchase cryptocurrencies or tokens with the intention of holding them until they increase in value. However, some promoters offer non-existent tokens, mispresent the project’s purpose, or fail to deliver on promised features. Investors lose their funds when the ICO fails or the tokens become worthless.

7. Internet Fraud

Internet or cyber fraud is perhaps the most diverse kind of investment fraud. Fraudsters leverage online communication channels and social media platforms to deceive individuals and businesses for financial gain. For example, they may establish fake investment websites, promise high returns, and create a frenzy on social media, attracting people to deposit money.

Another classic example is binary options fraud, where promoters manipulate results, payout structures, or terms and conditions to ensure investors consistently lose money. Other common examples include online auction fraud and phishing emails from financial institutions, allowing scammers to access sensitive information.

How Do You Prevent Investment Fraud?

Below are essential tips on how to mitigate investment fraud:

• Watch out for red flags: Take note of red flags like promises of high, guaranteed returns with low risks when making investments. Complex strategies, missing documentation, account discrepancies, and pushy salespeople are also possible indications of investment fraud.
• Conduct due diligence: Due diligence allows you to verify the promoter’s credibility, learn more about the business opportunity, and serve as a legal defense in lawsuits.
• Use contracts and investment policy statements (IPS): Legal documents such as investment contracts and IPS serve as evidence of transactions. They subject other parties to strict rules and can deter fraudsters.
• Seek professional assistance: Legal professionals like investment attorneys can help you detect fraudulent schemes and prepare the relevant documentation to safeguard your interests.

How Calabrese Law Associates Can Help

The attorneys at Calabrese Law Associates help investors in many ways, including the following:

• Conduct legal due diligence: We assist investors in conducting legal due diligence before advancing money to promoters.
• Draft and review contracts: We draft and review investment contracts and negotiate favorable terms to protect our clients’ interests.
• Legal representation: We offer aggressive legal representation in and out of court to help clients get the best possible results.

Contact Calabrese Law Associates for Legal Support

Calabrese Law Associates is equipped with trained and experienced investment law attorneys who are ready to provide the needed support. We serve individuals and businesses in the Greater Boston Area and throughout Massachusetts. We will listen to your case and develop practical strategies to yield the best possible results. Contact us now for legal support.

This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.

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