Investment scams: Protect yourself

Protect yourself and your money - use skepticism, knowledge, and common sense to guide your decisions.

The Securities and Exchange Commission (SEC) warns that investors must be aware that the first line of defense against telecommunications technology and other securities fraud is their own diligence and skepticism in evaluating a proposed investment – especially one not registered with the SEC. More information can be found on the Michigan State University Extension MI Money Health website regarding resources and education on personal finances.

Investopedia says that very few of the investment scams happening on the internet today are new. Most of the swindling techniques originated long ago as telemarketing, direct mail or even door-to-door selling schemes. But the internet adds another troubling dimension. For example, a fancy website can create the illusion of a large and reputable company, especially if it provides links to legitimate sites.

According to Investopedia, the following are a few investment scams to watch out for:

Ponzi Scheme

This is a pyramid scheme where money from new investors is used to provide a return to previous investors. The scheme collapses when money owed to previous investors is greater than the money that can be raised from new ones. Ponzi schemes always collapse eventually.

Pump and Dump

A highly illegal practice where a small group of informed people buy a stock before they recommend it to thousands of investors. The result is a quick spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock early sell off when the price peaks at a huge profit.

Off-shore investing

These are becoming popular scams to trap U.S. and Canadian investors. Be cautious when considering an investment opportunity originating in another country. It's extremely difficult for your local law enforcement agencies to investigate and prosecute foreign criminals.

Prime bank

This term usually describes the top 50 banks (or thereabouts) in the world. Prime banks trade high quality and low risk instruments such as world paper, International Monetary Fund bonds and Federal Reserve notes. You should be very wary when you hear this term – it is often used by fraudsters looking to lend legitimacy to their cause.

Investment seminar

The main goal of this educational “opportunity” is to sell investment products that generate commissions for promoters, mostly annuities, real-estate investment trusts, mutual funds, and reverse mortgages. That’s all perfectly legal. But protect yourself. Deal only with long-time, trusted financial advisors, never with new “friends” from a rubber-chicken sales seminar. Don’t provide financial information and don’t sign blank authorization forms.

Gold investment

Telemarketers promise consumers with assets that gold, silver, platinum and palladium bars, bullion, and coins are a surefire, low-risk investment and use high-pressure sales tactics to close the deal. What consumers aren’t told is that their investment is really a credit purchase. Their money is deposited in an account and the scammers don’t actually buy any precious metals. Instead, the crooks rake off poorly disclosed fees and commissions.

Is the product or investment opportunity registered with the Michigan Department of Insurance and Financial Services? Legitimate investment products and the representatives that sell them are all registered. You can call DIFS’s Consumer Hotline at 877-999-6442 to check out the legitimacy of any investment opportunity and the background of the individual selling it. In addition, you can also file a complaint about fraud or wrongdoing involving potential violations of the securities laws with the SEC.

It pays to do your homework before investing your hard-earned money. Protect yourself with due diligence to avoid getting scammed!

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