13 Types of Investment Scams in The U.S.

two golden and one silver round coins

Recently released data from the Federal Trade Commission reveals that American consumers reported losing over $3.8 billion to investment scams in 2022, surpassing any other category. This amount represents a significant increase from the reported losses in 2021. Investment fraud can take various forms and targets individuals regardless of their experience level in investing. You need to be informed about the different types of investment fraud to protect yourself. Research indicates that individuals who are knowledgeable about specific scams are 80% less likely to fall victim to them.

1. Affinity Fraud

Affinity frauds are sneaky scams that specifically target certain groups, like the elderly or religious communities. The scammers involved in these schemes often pretend to be part of the group or even recruit respected leaders to vouch for their shady deals. It's sad to say, but sometimes these leaders end up getting scammed themselves.

These frauds take advantage of the trust and close relationships within these groups. Because everyone knows each other so well, outsiders might not catch on to what's really going on. Victims might try to handle things internally instead of reaching out to the authorities or seeking legal help.

Affinity scams usually involve "Ponzi" or pyramid schemes, where money from new investors is used to pay off earlier ones. This makes the investment seem legit, but it's all just smoke and mirrors.

For example, on March 6, 2024, the Commercial Appeal broke the news that a Colorado pastor, Eligio Eli Regalado, and his wife, Kaitlyn Regalado, were in hot water for allegedly pulling off a sneaky cryptocurrency scheme that scammed over 300 churchgoers out of $3.2 million. The pastors' sales pitch supposedly included some divine inspiration, claiming that God wanted them to build this crypto empire. But when things started to fall apart, the pastor blamed it on a miscommunication with the man upstairs or suggested that God wasn't quite done with the project yet.

According to The Commercial Appeal, the pastor didn't have any background in finance or cryptocurrency before diving into this shady business. The legal complaint against him and his wife accuses them of using a big chunk of the money to fund a lavish lifestyle, splurging on home renovations, a fancy Range Rover, designer handbags, and bling.

The Colorado Securities Commissioner called out the pastor for taking advantage of the trust and faith of his own Christian community, selling them worthless cryptocurrencies with promises of striking it rich. It's a cautionary tale of greed and deception in the name of the Lord. 

Check out this article I have written on how to protect yourself from affinity fraud.

2. Advance Fee Fraud

Advance fee frauds are schemes that require investors to pay a fee upfront, before receiving any proceeds, money, stock, or warrants, in order for the deal to proceed. This advance payment is often disguised as a fee, tax, commission, or incidental expense that will supposedly be repaid later.

These fraudulent schemes often target investors who have already purchased underperforming securities, promising to sell those securities in exchange for an "advance fee." They may also prey on investors who have lost money in previous investment schemes.

To add a layer of legitimacy, fraudsters may instruct investors to wire advance fees to escrow agents or lawyers. They may also create official-looking websites and email addresses to deceive investors.

For example, in June 2023, FBI agents apprehended two individuals accused of preying on elderly individuals in a telemarketing scam. Michael Farole, 44, from West Los Angeles, and Christopher Lang, 42, residing in Hays, Kansas, were formally charged in a criminal complaint filed in U.S. District Court in Los Angeles with conspiracy to commit wire fraud.

The defendants allegedly posed as representatives of companies offering advertising and other services to current or former timeshare owners. They deceived victims into paying advance fees in exchange for services related to selling or renting their timeshares. However, these promised services were never delivered.

Following the initial payments, Farole and Lang persistently contacted the victims through phone calls, text messages, and emails, attempting to extort additional fees. The investigation uncovered that a minimum of 370 elderly individuals fell victim to this scheme, resulting in a collective loss exceeding $4.5 million.

3. Binary Options Fraud

A binary option is a specific type of options contract where the payout is determined by the outcome of a yes/no proposition, typically based on whether the price of a particular asset will rise above or fall below a specified amount. Once the option is obtained, the holder has no further decisions to make regarding its exercise, as binary options are exercised automatically. Unlike other types of options, a binary option does not grant the holder the right to buy or sell the specified asset. At the expiration of the binary option, the holder will receive either a predetermined amount of cash or nothing at all.

The binary options market largely operates through Internet-based trading platforms that may not comply with U.S. regulatory requirements and could potentially engage in illegal activities. As an investor, you need to be vigilant of fraudulent promotion schemes related to binary options and their trading platforms. Before making any investments, it is advisable to thoroughly research the background, registration, or license status of any firm or financial professional you are considering working with. 

This information can be found on the SEC’s Investment Adviser Public Disclosure (IAPD) database on Investor.gov, as well as the National Futures Association Background Affiliation Status Information Center’s BASIC Search. If you are unable to verify their registration, it is recommended not to engage in trading with them, refrain from providing any funds, and avoid sharing personal information.

4. High-Yield Investment Program Scams

The internet is flooded with what are known as "high-yield investment programs" or "HYIPs." These programs are typically operated by unlicensed individuals and are often fraudulent in nature. The key characteristic of an HYIP scam is the promise of extraordinary returns with minimal risk to the investor. These fraudulent websites may claim to offer annual, monthly, weekly, or even daily returns of 30% or 40% - or even higher. 

Some of these scams may also use the term "prime bank" program to lure in unsuspecting investors. If you are approached online to invest in one of these programs, you need to exercise extreme caution as it is likely a scam.

a screenshot of Investor.gov website's homepage

As I mentioned earlier, HYIPs are commonly run by unlicensed and unregistered individuals. Therefore, you must verify whether anyone offering or selling an investment is licensed or registered. This can be done easily by using the free search tool available on Investor.gov.

5. Impersonation Schemes

Scammers frequently pose as reputable organizations or individuals in order to deceive unsuspecting victims. They may pretend to be government agencies, employees, or legitimate investment professionals such as brokers and investment advisers. These impersonators often engage in advance fee scams or use stolen personal information to commit identity theft or fraudulently access financial assets. As an investor, you need to be vigilant and informed about these impersonation tactics.

Here are some key impersonation schemes to be aware of:
  • Impersonation of the U.S. Securities and Exchange Commission (SEC): Scammers may use various forms of communication, such as phone calls, voicemails, text messages, emails, letters, and certificates, to falsely represent themselves as the SEC. If you receive a communication from someone claiming to be from the SEC and requesting sensitive information like account numbers, passwords, or PIN numbers, exercise caution and verify the authenticity of the communication.
  • Impersonation of registered brokers or investment advisers: Fraudsters may create fake accounts or profiles that mimic legitimate individuals or firms in order to deceive investors. They may also direct individuals to fake websites that appear to be affiliated with reputable firms. It is important to verify the identity of any investment professional you are communicating with to avoid falling victim to impersonation scams.
If you are contacted by someone claiming to be from the SEC, it is recommended to use the SEC’s personnel locator at (202) 551-6000 to confirm the legitimacy of the communication. Additionally, you can contact the SEC directly at (800) SEC-0330 or email help@SEC.gov to verify the authenticity of any communication claiming to be from the SEC.

6. Social Media Investment Scams

Social media platforms such as Facebook, YouTube, X (formally Twitter), and LinkedIn have become indispensable tools for U.S. investors. Whether individuals are conducting research on specific stocks, seeking background information on a broker-dealer or investment adviser, looking for guidance on investment strategies, staying updated on market news, or engaging in discussions with fellow investors, social media serves as a valuable resource.

However, social media also presents opportunities for criminals to exploit. Fraudsters can easily reach out to a wide audience at a minimal cost by creating fake accounts, email addresses, and linking their posts to seemingly legitimate websites, videos, or photos to promote fraudulent investments.

The anonymity afforded by social media further complicates efforts to identify and apprehend fraudsters who use the platform to perpetrate schemes. If a fraudulent investment gains traction on social media, individuals who believe in its legitimacy may inadvertently encourage others within their network to invest, leading to affinity fraud.

To protect yourself from falling victim to investment fraud on social media, be wary of the following red flags: Unsolicited investment offers, independent, unbiased recommendations, as well as claims of guaranteed high returns with no risk.

7. Microcap Stock Fraud

Microcap stock fraud is a type of securities fraud that involves manipulating stocks of microcap companies, which are typically defined in the United States as those with a market capitalization of under $250 million. This fraudulent activity is estimated to result in losses amounting to billions of dollars annually. Many microcap stocks fall into the category of penny stocks, as defined by the SEC as securities trading at less than $5 per share, not listed on a national exchange, and failing to meet specific criteria.

According to a Wikipedia article, microcap stock fraud primarily occurs within stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, which generally do not meet the listing requirements of major stock exchanges. Some instances of fraud also take place within stocks traded on the NASDAQ Small Cap Market, now known as the NASDAQ Capital Market.

The Securities and Exchange Commission (SEC) advises caution when receiving unsolicited stock promotions. Individuals promoting the stock may have ulterior motives, aiming to profit at the expense of unsuspecting investors by artificially inflating the stock price and subsequently selling shares, according to the SEC. 

Fraudsters often leverage emerging technologies or industries, such as crypto assets, to lure investors into fraudulent or manipulative schemes. For instance, they may make public announcements intended to impact a company's stock price or promote companies claiming to be developing products or services related to current news events or trends.

8. Ponzi Scheme

A Ponzi scheme is a fraudulent investment scheme in which returns are paid to earlier investors using the capital of new investors. Those behind Ponzi schemes often promise high returns with minimal risk, claiming to invest the money when in reality, they are simply using it to pay off earlier investors and pocketing some for themselves.

Due to the lack of legitimate earnings, Ponzi schemes rely on a continuous influx of new investments to sustain themselves. Once it becomes difficult to attract new investors or when existing investors begin to withdraw their funds in large numbers, these schemes inevitably collapse.

The term "Ponzi scheme" is derived from Charles Ponzi, a notorious con artist who swindled investors in the 1920s through a postage stamp speculation scheme.

Recently, the Financial Times reported on a Ponzi scheme allegedly orchestrated by a Harvard MBA graduate who targeted fellow alumni of the US business school. The scheme, which amassed over $2.9 million, was brought to a halt by a New York court. New York Attorney General Letitia James spearheaded the effort to freeze assets controlled by Vladimir Artamonov following the tragic suicide of a client who lost $100,000.

This case serves as a stark reminder that individuals with advanced business education can still fall victim to financial scams and deceptive marketing tactics that exploit alumni networks. Artamonov managed to deceive at least 29 individuals, many of whom he had met through his Harvard Business School connections. This incident underscores the susceptibility of even sophisticated investors to fraud, particularly when perpetrators leverage personal relationships and networks to cultivate a false sense of trust, as seen in Affinity Fraud.

Letitia James emphasized that Artamonov leveraged his Harvard Business School alumni status to deceive his peers, presenting himself as a trustworthy figure while engaging in fraudulent activities. Instead of upholding his reputation, Artamonov exploited the trust of others, resulting in devastating consequences.

9. Pre-IPO Investment Scams

A pre-IPO investment scam is a fraudulent scheme that deceives individuals and investors by offering significant returns on early investments in a company before it goes public through an Initial Public Offering (IPO).

These scams prey on the appeal of up-and-coming companies, especially in industries like technology or biotech, which are seen as having great potential for growth. The scam usually involves selling shares or investment opportunities in companies that either do not exist, have no intention of going public, or have a very uncertain future regarding their public listing.

As an investor, you should be cautious and conduct thorough research before committing to any pre-IPO investment opportunities to avoid falling victim to these deceptive practices.

For example, on Dec. 7, 2023, the Securities and Exchange Commission dropped some serious charges on Raymond J. Pirrello, Jr., Marcello Follano, Robert Cassino, Anthony DiTucci, Joseph Rivera, and their companies based in New Jersey or New York - Prior 2 IPO Inc., Late Stage Asset Management, LLC, Pre IPO Marketing Inc., and JL Rivera Enterprises Ltd. These guys were accused of pulling off some shady stuff with investments in pre-IPO companies.

According to the SEC, these dudes used a bunch of unregistered sales agents all over the country to scam over 4,000 investors worldwide out of at least $528 million in unregistered offerings of pre-IPO securities. They lied to investors, saying there were no upfront fees and that they'd only make money after the pre-IPO companies went public. Turns out, they were actually charging investors hidden markups, some as high as 150 percent, and pocketed over $88 million for themselves.

10. "Prime Bank" Investment Scams

Have you heard of prime bank fraud? It's basically a fancy way of saying a scam that promises big returns in a short amount of time. Scammers claim they have access to special financial products that they can buy low and sell high. But in reality, these products don't even exist.

To make their scheme seem legit, scammers might say the financial product is backed by big names like the World Bank or the U.S. Federal Reserve. They also like to keep things hush-hush, saying it's invitation-only for rich folks. If you ask for proof or references, they'll probably dodge the question or make you sign a non-disclosure agreement.

So, if someone tries to rope you into a Prime Bank program or any other high-yield investment opportunity, just know it's all a scam. Don't fall for it!

11. Promissory Note Fraud

A promissory note is a type of debt instrument, similar to a loan or IOU ("I owe you"), that a company may issue in order to raise capital. Investors typically provide funds to a company with the expectation that the company will repay the principal amount along with interest within a specified timeframe. While legitimate promissory notes do exist, they are not commonly offered to the general public. Promissory notes that are marketed widely to individual investors often turn out to be fraudulent schemes. The Connecticut Department of Banking has reported that investors in Connecticut have suffered losses exceeding $7 million due to such fraudulent investments.

To protect yourself from falling victim to promissory note fraud, you need to be aware of the following:
  • Promissory notes are considered securities and must be registered with the Securities and Exchange Commission (SEC), a state securities regulator, or be exempt from registration. Legitimate promissory notes can typically be verified by checking the SEC’s EDGAR database or contacting your state securities regulator.
  • The seller of the promissory note must be licensed to sell securities. You can verify the registration status of your investment professional by using the free search tool on the Investment Adviser Public Disclosure (IAPD) website or Investor.gov. Alternatively, you can contact your state securities regulator for assistance.
Once again, promissory notes may seem like secure and profitable investments at first glance. However, numerous investors have found themselves disappointed with unfulfilled promises. Savvy investors understand that if an investment appears overly enticing, it likely carries hidden risks.

12. Pump and Dump Schemes

Pump and dump schemes consist of two main components. Initially, promoters engage in activities aimed at artificially inflating the price of a stock through the dissemination of false or misleading information about the company. Subsequently, once the stock price has been artificially inflated, fraudsters proceed to the second phase of the scheme, wherein they aim to profit by selling off their own holdings of the stock, thereby "dumping" shares into the market.

These deceptive practices are frequently observed on the Internet, where individuals are often encouraged to swiftly purchase a particular stock. Oftentimes, promoters will assert that they possess confidential information regarding a forthcoming development that will have a positive impact on the stock. Following the sale of their shares and the cessation of their promotional efforts, the stock price typically experiences a decline, resulting in financial losses for investors.

13. AI Investment Scams

AI (Artificial Intelligence) investing is a rapidly growing trend that uses sophisticated software and algorithms to analyze market trends and historical data in order to make predictions while taking into account factors such as price volatility and risk. Unfortunately, scammers have begun exploiting the excitement surrounding AI by deceiving investors and absconding with their funds.

The Department of Financial Protection and Innovation in California has noted that many investment platforms now offer mobile AI investing apps, AI trading bots, and website designs that incorporate AI technology into investment strategies. The DFPI has observed a rise in investment scams that purport to leverage artificial intelligence to generate profits for investors. These fraudulent schemes claim that their AI systems can trade cryptocurrencies on behalf of investors, promising unrealistically high returns.

On January 25, 2024, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy, the North American Securities Administrators Association (NASAA), and the Financial Industry Regulatory Authority (FINRA) jointly issued an Investor Alert to warn investors about the increasing prevalence of investment frauds involving the supposed use of AI and other emerging technologies. The alert cautions individual investors to be vigilant, as malicious actors are exploiting the growing complexity and popularity of Artificial Intelligence to ensnare victims in scams.
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