The Most Common Trading (Investment) Scams Which Have Robbed Victims of $100,000+
Excerpt: Real investments need time and consideration. It’s considered a good idea to consult with someone you trust and who you believe is looking out for your best interests before making an investment. It’s also important to do some research. Begin by renewing your computer’s security features and practicing basic network security on all of the computers you use to access financial accounts.
Scams involving investments often offer large payments, rapid cash, or guaranteed profits. Always be wary of investment possibilities that provide a significant return with little or no risk — if it seems too authentic, it most likely is, and it’s a scam. Investment con artists entice you by promising to show you how to make a lot of money quickly, simply, and safely – usually by investing in the financial or real estate markets. Scammers will sometimes start with a free seminar and charge you a high fee for their “proven” investment strategies. But it’s the lies they tell you that are the real trickery.
Opportunistic hackers commit even more fraudulent operations, taking advantage of the explosive global situation. Consumers today expect their financial institutions to provide more online and mobile services. As a result, traditional banks are migrating to the digital realm. They deemphasize in-person transactions and complete more account onboarding and transaction approvals online, making it more challenging to verify identities. Before you invest, do some homework. You can find out who the website owner is by using search engines. It’s also a good idea to double-check that any account information you’ve been instructed to transmit corresponds to the name of the company you’re supposed to be dealing with. This article will explain the many sorts of scams and how they work.
If you’re someone who is into Investment, then you’re definitely at the right place. We can give you the best practices in identifying red flags as well as help you in recovering your stolen money from scammers!
Table of Contents
CHAPTER 1: How Did Investment Scams Come into Being?
A Ponzi scheme is a misleading financial scheme that offers investors significant returns with little risk. A Ponzi scheme is a kind of investment fraud in which money is collected from later investors to pay off previous investors. This is comparable to a pyramid scam in that both rely on new investors’ money to pay back the last people who invested. When the influx of new investors slows up, and there isn’t enough money to go around, both Ponzi and pyramid schemes inevitably collapse. The schemes start to fall apart at this point.
A Ponzi scheme is a financial scheme in which customers are promised a high profit with little or no risk. Companies that engage in a Ponzi scheme devote their resources to acquiring new investors. This additional revenue is used to pay original investors their profits, labeled as a valid transaction profit. Ponzi schemes rely on a steady stream of new investments to pay out profits to existing investors. The scheme falls apart when this flow runs out.
In 1920, a con artist named Charles Ponzi invented the term “Ponzi Scheme.” However, the first known cases of this type of investment fraud date back to the mid-to-late 1800s, when Adele Spitzeder in Germany and Sarah Howe in the United States staged them. In reality, Charles Dickens explained the methods of what became known as the Ponzi Scheme in two separate novels, Martin Chuzzlewit, published in 1844, and Little Dorrit, published in 1857.
In 1919, Charles Ponzi’s first scheme targeted the US Postal Service. The postal service had just invented international reply coupons, which allowed senders to purchase postage ahead of time and include it in their mail. The recipient would then take the coupon to a nearby post office and exchange it for the priority airmail postage stamps required to respond. Arbitrage is the term for this type of transaction, which is not unlawful. Ponzi, on the other hand, became greedy and increased his efforts.
He offered returns of 50% in 45 days or 100% in 90 days under the banner of his company, Securities Exchange Company. Investors were quickly drawn to him due to his success with the postage stamp plan. Ponzi simply redistributed the money instead of investing it, telling the investors they had made a profit.
The fraud ran until August 1920, when the Securities Exchange Company was investigated by The Boston Post. Ponzi was arrested by the authorities on August 12, 1920, due to the newspaper’s investigation. He was charged with multiple charges of mail fraud. The Ponzi scheme concept did not die in 1920. The Ponzi scam evolved alongside technological advancements. Bernard Madoff was convicted in 2008 of running a Ponzi scheme in which he fabricated trading reports to indicate a client was profiting from assets that didn’t exist. On April 14, 2021, Madoff died in prison.
Understanding how previous investor disasters occurred can aid present investors in avoiding them in the future. We’ve compiled a list of some well-known companies that have defrauded investors. Some of these instances are genuinely remarkable. Consider them from the standpoint of a shareholder. Unfortunately, because they were duped into investing, the stockholders involved had no means of knowing what was going on. This carpet cleaning company’s owner, Barry Minkow, predicted that it would become the “General Motors of carpet cleaning” in the 1980s.
Minkow appeared to be establishing a multibillion-dollar business, but he did so by forging and stealing documents. He fabricated more than 20,000 fake documents and sales receipts without anyone noticing. Minkow spent more than $4 million to lease and remodel an office facility in San Diego, despite the fact that his company was a deception designed to deceive auditors and investors. In December of 1986, ZZZZ Best went public with a market capitalization of more than $200 million. Barry Minkow, astonishingly, was only a teenager at the time.
He was given a 25-year prison sentence. Centennial Technologies’ CEO, Emanuel Pinez, and his management reported that the company made $2 million in revenue from PC memory cards in December 1996. Customers were actually receiving fruit baskets from the company. Employees then created bogus paperwork to prove that sales were being recorded. On the New York Stock Exchange, Centennial’s stock soared 451 percent to $55.50 per share (NYSE).
Centennial misrepresented its earnings by nearly $40 million between April 1994 and December 1996, according to the Securities and Exchange Commission (SEC). Surprisingly, the corporation made a profit of $12 million after losing over $28 million. The shares dropped to under $3. Almost 20,000 investors lost nearly all of their money in a company that was once a Wall Street darling. Pinez was convicted on five charges of securities fraud, including insider trading and booking false product sales to boost reported income.
This Canadian corporation was involved in one of the world’s greatest stock frauds. Its gold property in Indonesia, which was estimated to hold more than 200 million ounces of gold, was dubbed the world’s richest gold mine. Bre-stock X’s price soared to a high of $280 (split-adjusted), making ordinary individuals millionaires overnight. Bre-X had a market valuation of $4.4 billion at its peak.
When the gold mine was discovered to be a hoax on March 19, 1997, the party came to an end, and the stock dropped to cents. The Quebec public sector pension fund, which suffered $70 million, the Ontario Teachers’ Pension Plan Board, which lost $100 million, and the Ontario Municipal Employees’ Retirement Board, which lost $45 million, were among the biggest losers.
The Financial Conduct Authority, short for (FCA) , is asking people over the age of 55 to double-check that investment “opportunities” are authentic before handing over their cash. This comes as new research from the Financial Conduct Authority (FCA) reveals that a fifth (22%) of over 55s with above-average incomes believe they have been targeted by a fraudulent investment scam in the last three years, with a third (32%) of those aged 75 and over believe they have been targeted. Last year, victims of investment fraud lost an average of £32,0001 apiece.
Recent pension freedoms, along with low-interest rates that offer dismal savings returns, have made the over 55s a more appealing target for fraudsters. The new study is part of the Financial Conduct Authority’s (FCA) ScamSmart initiative, which aims to safeguard customers against investment fraud. The FCA Warning List is an interactive website that enables investors to learn more about the hazards of a particular investment and check a list of firms that the FCA knows are operating without its permission.
Despite the large number of individuals who may be targeted by these scams, one out of every eight (14%) over 55s who have invested in financial products (such as stocks and shares) spends little or no time examining them before handing over money. The over 75s, who are the most likely to indicate they had been contacted by investment fraud, are also the group with the least amount of investigation (26 percent ). Looking through a company’s website was the most common check done before investing in a financial product (41 percent ).
Investment fraudsters and unlicensed organizations, on the other hand, are known to develop highly professional-looking websites to entice victims, underscoring the importance of conducting further checks to ensure that an investment is real. Far fewer (27 percent) sought professional, unbiased advice before investing, something the FCA encourages customers to do. Interestingly, even though the money spent was less, more time and effort was spent checking other high-cost goods. In our poll, the average cost of significant construction work was £25,000, compared to an average of £36,000 spent on financial investments like stocks and shares.
Despite this, significantly more respondents (47 percent) indicated they thoroughly examined building work compared to those who thoroughly researched financial assets (38 percent ). Over half of individuals who have invested in financial items did so on their own (55 percent) rather than deliberating with family. This outnumbers any other large financial decision, such as purchasing a home, a car, or taking a significant vacation. Fraudsters frequently advise their victims to keep their investments a secret so that friends and family do not discourage them from doing so.
CHAPTER 2: The Most Common Forms of Investment / Tradings Scams
In a low-interest economy, the prospect of high-interest promissory notes may entice investors, particularly the elderly and those on a fixed income. A promissory note is a written commitment to pay (or return) a specific amount of money at a future date or upon demand. Interest is usually paid on promissory notes, either at regular intervals prior to maturity or at the moment of maturity.
Promissory notes are a type of debt instrument that companies can use to raise funds. They are often sold to sophisticated or institutional investors. However, this is not the case for all promissory notes. Retail investors may be offered and sold promissory notes.
Unless they qualify for an exemption from securities registration, such notes must be filed with the Securities and Exchange Commission and/or the state(s) in which they have been sold. The majority of promissory notes marketed to the general public must also be sold by securities salespeople who have a state securities license or registration.
Although state securities regulators have found a regrettably high number of promissory note frauds, promissory notes from legitimate issuers can give reasonable investment returns at an appropriate degree of risk. Individuals thinking about buying a promissory note should do their homework on the investment – and the persons selling it. Promissory notes with a term of nine months or less should be avoided by investors because they do not require federal or state securities registration.
Most (but not all) of the fraudulent conduct utilizing promissory notes identified by state securities regulators has included such short-term notes. These short-term debt instruments may be provided by unknown (or even non-existent) organizations and guarantee enormous profits – even over 15% monthly – with little or no risk. However, if an investment appears to be too good to be true, it most likely is. To raise funds, many businesses employ valid promissory notes. Businesses frequently employ legitimate promissory notes.
These transactions typically include experienced investors who have conducted extensive research on the person or firm in which they are investing. Bogus promissory notes usually come with higher-than-average fixed interest rates. They might also guarantee the principal, which legal notes don’t do because there’s always the possibility that a corporation won’t be able to satisfy its obligation
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How Does it Work?
Promoters market these notes as short-term loans with large returns in exchange for borrowing money from you, frequently with no risk. It is impossible for the seller to claim that the notes are “risk-free,” “insured,” or “guaranteed.” Every investing opportunity comes with a certain amount of risk. The notes may be labeled “prime quality” to make them appear to be a high-quality investment when the company issuing the note is a start-up or non-existent.
The con artist will attempt to make the notes sound as if they are a sure thing for investors. The scam artist may make some first payments to you, similar to other investment schemes, to earn your trust. Payments may grow inconsistent or cease altogether as time passes. This usually means that the fraud is coming to an end, and you will lose any money you haven’t yet received.
Keep a lookout for one or more of the following traits:
- A start-up company with little or no business history sells “high-quality” notes to retail investors, promising returns above the market average for a similar type of investment.
- The notes are marketed as a short-term, high-interest investment.
- The notes are sold or promoted by someone who is not registered with a securities regulator.
A promissory note can be explained as a kind of debt that a firm can issue to raise funds, analogous to a loan or an IOU. An investor typically agrees to lend money to a company for a specified length of time. In exchange, the corporation guarantees the investor a specified return on their investment, usually principle + annual interest. While promissory notes can be a good investment, those that are sold to a large number of people are frequently scams. To control the fraudulent sale of promissory notes to investors, the SEC and state securities regulators across the country have joined forces. But we won’t be able to halt every scam.
That’s why, before you invest in a promissory note, you should ask tough questions – and demand answers. Make certain you understand how they operate and the dangers they pose. These pointers will explain how promissory note fraud can happen and how to recognize con artists.
Promissory notes have recently been used by fraudsters around the country to scam investors out of hundreds of millions of dollars.
The majority of promissory note scams follow a predictable, deceptive fact pattern:
- Independent life insurance agents are persuaded to sell promissory notes by fraudsters who may or may not be linked with the company, tempting them with lucrative commissions of up to twenty or even thirty percent. These agents frequently lack a securities sales license. And they frequently depend only on the information provided by the corporation while selling the notes, which later proves to be inaccurate or deceptive.
- Investors are tempted to buy promissory notes by the promise of a high, fixed-rate return – up to 15% or 20% – with a low amount of risk. Because the seller fraudulently states that the promissory notes are “guaranteed” or insured, they may appear even more appealing. And because they know and trust the seller’s insurance agents with whom they’ve done business in the past, few investors ask critical questions about these transactions.
- The fraudsters pay the vendors’ commissions with a percentage of the money they earn from investors. However, they usually take the rest and spend money on personal needs or high-flying lifestyles. They may also utilize some of the earnings to fund a complex “Ponzi” plan in which proceeds from the issuance of new notes are used to pay interest on older notes.
Some con artists try to avoid paying back their victims’ money by getting them to “rollover” their promissory notes at maturity. These investors may continue to receive interest payments for a period of time, but they rarely receive their capital back.
Scams involving promissory notes frequently target the elderly, robbing them of their retirement funds at a time when they can least afford it. However, no one is immune. When it comes to removing investors from their money, fraudsters rarely discriminate. Most investors aren’t even aware that their money is at risk until it’s much too late.
Ways To Avoid Promissory Note Scams
Here’s how to avoid making the costly error of buying a phony promissory note:
- Keep in mind that valid corporate promissory notes are rarely sold to the general public. Instead, they’re usually sold privately to wealthy bidders who conduct their own “due diligence” or investigation on the company. If someone phones you or comes to your door offering to sell you a promissory note, you’re probably being conned.
- Find out if the investment is registered with the Securities and Exchange Commission (SEC) or your state securities regulator – or if it is exempt from registration. The majority of valid promissory notes may be easily verified by searching the SEC’s EDGAR database or phoning your state securities regulator, which can be found on the North American Securities Administrators Association’s website. If the promissory note isn’t registered, you’ll have to conduct your own investigation to determine whether the corporation can pay its loan.
- If the seller claims that the promissory note is not a security, be wary. Promissory notes used in scams are normally securities that must be registered with the Securities and Exchange Commission (SEC) or your state securities authority – unless they qualify for an exemption.
- Verify that the vendor is fully licensed. Without a securities license, insurance agents are unable to market securities, including promissory notes. Inquire with your state securities regulator if the individual or firm is licensed to offer securities in your state and if they have a history of complaints or fraud. This information is also available by calling the FINRA public disclosure hotline or visiting their website.
- Be wary of claims of “risk-free” profits. Con artists frequently utilize these promises as bait to entice their victims. Always remember that if anything appears to be too good to be true, it most likely is.
- Be wary of promissory notes that claim to be “insured” or “guaranteed,” especially if they are issued by a foreign insurance organization. Make sure to check with your state insurance commissioner to see if the foreign insurance company can legally operate in the US.
- Compare the promissory note’s rate of return to current market rates for fixed-rate assets such as long-term Treasury bonds or FDIC-insured certificates of deposit. Proceed with caution if the seller guarantees an above-market rate on a short-term note.
Ponzi/ Pyramid Scams
Ponzi schemes are frauds in which cash raised from new investors are used to pay off old investors. There is no genuine investment, and many scams eventually fail. Scammers use social media to contact consumers and encourage them to download or invest in apps.
They guarantee you will see huge profits immediately, and you will believe you will, but the fraudster will pay you a return using money that has been invested by others. Once you’ve seen a profit, the con artist will persuade you to tell your friends, family, and coworkers about the scheme. They’ll pay them ‘returns’ and ask them to attract others they know to join the program. When the scammer goes out of business, or the pool of eager recruits shrinks, the fraudster will vanish, and no one will be able to recover their funds.
A Ponzi scheme (called after swindler Charles Ponzi of the 1920s) is a plan in which previous investors are compensated using monies put by later investors. In Charles Ponzi’s instance, it wasn’t just the amount of the con that mattered; it was also the speed with which it was carried out. Ponzi made an estimated $15 million in eight months by persuading lenders to invest in international postal reply coupons. Despite the fact that he wasn’t the first to do it, his story became so well-known that the basic principles of a pyramid scheme — taking money from a new investor to repay an old one — were named after him.
Bernard Madoff, who scammed investors in Bernard L. Madoff Investment Securities LLC, conducted the most renowned Ponzi scheme in modern history—and the single largest fraud of investors in the United States—for more than a decade. Madoff amassed a wide network of investors from whom he obtained funds by pooling the funds of his nearly 5,000 clients into an account from which he withdrew. He never truly invested the money, and when the financial crisis of 2008 hit, he couldn’t keep up the deception any longer. The total loss to investors, according to the SEC, is estimated to be around $65 billion. The scandal spawned a period known as Ponzi Mania in late 2008, during which authorities and investing experts were on the lookout for further Ponzi scams.
The underlying investment claims in a Ponzi scheme are usually wholly fictitious; very few, if any, actual physical assets or investments exist. There isn’t enough money to pay off promised returns and compensate investors who try to cash out when the overall number of participants climbs, and the supply of possible new investors shrinks. A Ponzi scheme will explode when the con artist is unable to keep up with the payments promised to investors. Investors may lose their whole investment in the fraud if the plan crashes (as it always does).
In many situations, the culprit will have used investment funds for personal purposes, depleting capital and hastening the bubble’s implosion. A pyramid scheme, on the other hand, is a deceptive multi-level marketing system in which investors receive prospective returns by recruiting more and more new investors. Multi-level marketing tactics aren’t inherently dishonest, and there are a slew of legal multi-level marketing firms selling a range of consumer goods and services.
The lack of a legitimate underlying investment firm or product on which a multi-level marketing approach may hope to be sustained is what turns it into a fraudulent pyramid scam. These Ponzi schemes, made famous in the United States by Charles Ponzi, guarantee enormous returns on investments. There is no actual investment, but each member is encouraged to bring in new investors. To give the illusion of productive investment, investors’ money is utilized to pay out rewards to those who are brought into the plan. The only people who profit from the system are the con artists who take money from it.
How Does A Ponzi Scheme Work?
Ponzi schemes must have a steady inflow of new investors’ funds to stay afloat. Even if the original investors receive a return on their investment, they rarely get their entire investment back. Original investors are frequently encouraged to “rollover” or reinvest their monies in the scheme by promoters. The scammers give a return to initial investors from the amount deposited by later investors to entice people to reinvest or help with the word-of-mouth promotion of the scheme. Fraudsters may also construct fictitious statements to show investors how their money is rising at a rapid pace.
Ponzi scheme operators may spend money on running the scam and paying out investors, but the vast majority of investors’ funds are stolen or wasted. A Ponzi scheme is a kind of financial fraud in which existing investors are compensated with monies raised from new investors. Organizers of Ponzi schemes frequently offer to invest your funds and earn high returns with little or no risk.
However, the fraudsters in many Ponzi schemes do not invest the money. Instead, they utilize it to compensate previous investors, with the possibility of keeping part for themselves. Ponzi schemes require a constant and assured flow of new money to survive because they have little or no actual earnings. These schemes usually collapse when it becomes difficult to recruit new investors or when a big percentage of existing investors payout.
Keep a lookout for one or more of the following traits:
- Discuss the possibility of pooling your funds with other investors.
- People who promote intricate, secret investments with some level of exclusivity.
- Individuals who are not registered to trade stocks or other investment goods but are selling them.
- Documentation that appears to be a counterfeit or statements and contracts that are not affiliated with a recognized firm.
- Excessive profits with little or no risk. Every investment entails some level of risk, and higher-yielding investments often entail more risk. Any “guaranteed” investment opportunity should be viewed with caution.
- Extremely consistent results. Investments fluctuate in value over time. Be wary of an investment that consistently produces positive returns regardless of market conditions.
- Investments that aren’t registered. Ponzi schemes usually include investments that aren’t registered with the Securities and Exchange Commission (SEC) or state regulators.
Investors will benefit from registration since it gives them access to information about the company’s management, products, services, and finances.
- Vendors who aren’t licensed. Investment professionals and firms must be licensed or registered under federal and state securities regulations. The majority of Ponzi schemes are run by unlicensed people or unregistered businesses.
- Complex and secretive strategies. If you don’t comprehend anything or can’t receive all the facts you need, don’t invest.
- Paperwork-related issues. Errors in account statements could indicate that funds are not being invested as promised.
- Payments are difficult to come by. If you don’t receive a payout or are having trouble cashing out, be skeptical. Promoters of Ponzi schemes sometimes try to deter players from cashing out by promising even bigger rewards if they continue in the game.
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Real Estate Investment Fraud
The promise of making rapid money through real estate investments continues to entice investors. Scams in real estate investing are a common investor pitfall. Investors should be wary of real estate investing seminars, especially those that are aggressively pitched as an alternative to more standard retirement planning strategies such as stocks, bonds, and mutual funds. Attendees at these conferences may hear testimonies from persons who claim to have doubled or quadrupled their income by investing in real estate. However, these assertions could be nothing more than a bunch of nonsense.
So-called “hard-money lending” and “property flipping” are two of the most popular investment pitches. Real estate ventures financed through methods other than standard bank borrowing are referred to as hard-money lending. (The term “hard to get” refers to the fact that this type of loan would be difficult to obtain from a regular lender.) Hard-money loans are made by companies or rich individuals who specialize in making them because they might have relatively high-interest rates.
Borrowers may, however, look for such loans from retail investors. Investors may be enticed by the opportunity to earn higher rates of return by engaging in a hard-money loan, but they may (or may not) be aware of the possible dangers, such as the borrower’s credit, predicted income stability, or time limits. An investor, lender, and borrower are the three parties involved in a hard-money transaction.
To lend to borrowers, private lenders raise capital from investors. When funds from multiple investors are pooled, the investment instrument used to buy the property is referred to as a “pooled investment,” which is a security subject to securities laws and regulations’ safeguards and disclosure requirements. Hard-money loans are primarily based on the value of the property with which they are managed to secure, which the borrower already owns or is acquiring with the loan. While traditional loans are based on the borrower’s ability to repay using identifiers such as credit scores and income, hard-money loans are primarily based on the value of the property with which they are secured.
If the borrower defaults or runs out of cash, the lender may be able to take the asset and sell it, but depending on how the loan is structured, it may be more difficult for the investor to recoup the money. Property flipping is the process of buying distressed real estate, renovating it, and reselling it as soon as possible in the hopes of making a profit. A property flipper can either finance the flip with their own money or with the help of others. Property flipping that is financed with borrowed money or outside investments can be completely legal, but it can also be a source of fraud.
For example, a fraudster could swindle potential flip investors by misrepresenting the underlying property’s worth or the flip’s estimated profit potential. Scammers may also misappropriate borrowed or invested cash, or they may attempt to utilize unwary investors as “straw buyers” with outside banks or mortgage lenders, using the names and credit ratings of the investors to facilitate their schemes.
Conferences on how to invest in real estate, both in-person and online, frequently promise “risk-free” training or business coaching solutions. They may entice you in with large promises or assurances of financial independence, claiming to be able to show you how to generate a lot of money. Many real estate investment workshops, however, are frauds.
How Does it Work?
While many individuals buy real estate as just a personal investment or a home to stay in, it is also sold as security from time to time. These are sales in which the buyer does not own or live on the property but may be able to profit from the efforts of another party involved with the property. Illegal schemes are frequently marketed through aggressive promotion (advertisements disguised as news items) that promise large profits to investors in a short period of time.
Investors invest in a fund that is presumably used to buy and hold real estate. Frequently, investors are paid hefty fees and given little in the way of specifics or risk disclosure. The property value is sometimes overstated to entice investors in illicit schemes; other times, there is no property at all. Once you invest, communication dwindles or stops entirely, as it does with many other schemes.
Red Flags To Look Out For!
Promises to help you “become rich quick” or live your dream retirement with real estate passive income.
- A real estate investment or loan with insufficient documentation or disclosure.
- A corporation or investment that hasn’t filed a prospectus with the Securities and Exchange Commission.
- Those who are not registered with a securities regulatory authority.
Real estate investment seminar promotional materials and sales presentations frequently contain exaggerated claims:
- Scammers claim that regardless of your expertise or training, you may make a lot of money quickly. That, however, is not the case.
- Scammers claim that their offer is a “sure thing” that would provide you with security for years. It is not going to happen.
- Scammers claim that working part-time or from home will earn you a lot of money. However, the majority of people do not.
- Scammers guarantee that you’ll be guided every step of the way to success. However, there is frequently minimal coaching and no success.
- Scammers say that the scheme was successful for other people, including the organizers. It may have done so for a few people, but the majority of consumers never get their money back.
Don’t be fooled by advertisements boasting about how much money people gained with little time, effort, or danger. Or advertisements with celebs endorsing the program. Such assertions are untrustworthy and do not imply that the program is effective. Fake testimonials are frequently used in real estate investment scams, and people are paid to praise their programs. The payoff for most people who attend these real estate investment workshops — including some that cost thousands of dollars to attend — falls short of the promises made. In fact, the majority of people never see their money again.
Short-term loans to purchasers, construction loans to corporations, and even shares in a building that would make money and pay it out to investors are all examples of real estate schemes. Scam artists promise investors high, guaranteed rates of return in exchange for a tangible asset such as real estate.
Predatory lending is when borrowers are subjected to unfair, fraudulent, or abusive loan terms. These loans frequently have excessive interest and fees rates, deplete the borrower’s equity, or place a credit-worthy borrower in a lesser credit-rated (and more costly) loan, all to the lender’s profit. Predatory lenders take unfair advantage of borrowers’ lack of understanding of financial transactions by employing pushy sales tactics. They persuade, induce, and aid a debtor to take out a loan that they will not fairly be able to repay by dishonest or fraudulent conduct and a lack of transparency.
Predatory lending refers to any unethical activities used by lenders to attract, encourage, mislead, and aid borrowers into taking out loans that they cannot afford to repay or must repay at a rate that is significantly higher than the market rate. Predatory lenders take advantage of borrowers’ situations or ignorance. A loan shark, for example, is the prototypical predatory lender—someone who lends money at exorbitant interest rates and may even threaten violence to collect debts. However, stronger established institutions such as banks, financial firms, mortgage companies, attorneys, and real estate contractors engage in a significant amount of predatory lending.
Many borrowers are put in danger by predatory lending. People with low credit ratings, the less educated, or those who are exposed to discriminatory lending policies based on race or ethnicity are typical targets. Predatory lenders frequently target areas where there are few other loan options, making it harder for customers to shop around. They employ aggressive sales strategies such as mail, phone, TV, radio, and even door-to-door sales to entice customers, and they profit from a range of unethical and fraudulent practices.
Predatory lending is intended to benefit the lender first and foremost. It disregards or impedes a borrower’s ability to pay back a debt. Lending practices are frequently dishonest, attempting to exploit a borrower’s lack of understanding of financial concepts and loan restrictions.
The Federal Deposit Insurance Corporation (FDIC) has recognized many of these strategies, as well as others:
- Excessive and abusive fees: These are frequently hidden or minimized because they are not included in a loan’s interest rate. Fees of more than 5% of the loan amount are not uncommon, according to the FDIC. Prepayment penalties that are too high are another example.
- Balloon payment: A balloon payment is a one-time, extremely large payment made at the end of a loan’s term, which is frequently employed by predatory lenders to make your monthly payment appear cheap. The issue is that you may not be able to afford the balloon payment, forcing you to refinance, incur further fees, or default.
- Loan flipping: When a lender forces a borrower to refinance many times, the lender earns fees and points each time. As a result, a borrower may become imprisoned in an ever-increasing debt load.
- Asset-based lending and equity stripping: A lender gives you a loan based on your asset, such as your home or car, rather than your ability to repay it. You risk losing your home or asset if you fall behind on your payments.
Equity-rich, cash-poor elderly persons on fixed incomes may be targeted with loans (for example, for a house repair) that they will struggle to repay, jeopardizing their home’s equity.
- Unnecessary add-on products or services, such as mortgage life insurance with a single premium.
- Steering: Borrowers are steered towards pricey subprime loans despite the fact that their credit histories and other variables qualify them for prime loans.
- Reverse redlining: The Fair Housing Act of 1968 abolished redlining, a racist housing policy that effectively prevented Black families from obtaining mortgages.
However, the majority of inhabitants in redlined areas are Black and Latino. Predatory and subprime lenders frequently target them in the form of reverse redlining.
What Does Predatory Lending Look Like?
Predatory lending occurs when a lender tries to take advantage of a borrower by binding them to be unfavorable or unmanageable loan terms. Aggressive solicitations, excessive borrowing fees, hefty prepayment penalties, large balloon payments, and being encouraged to continuously flip loans are all signals that you are a victim.
Is it Illegal to Make Predatory Loans?
Yes, in theory. You may have been the sufferer of a crime if you were persuaded and misled into taking out a loan with greater costs than your risk profile justifies or that you are unlikely to be able to repay. Consumers are protected by law from predatory lending, yet many lenders continue to get away with it, partially because consumers are unaware of their rights.
Any kind of lending practice that imposes unfair and abusive loan terms on borrowers, such as high-interest rates, exorbitant fees, and terms that deprive the borrower of equity, is known as predatory lending. To induce borrowers to take out loans they can’t afford, predatory lenders frequently utilize aggressive sales methods and dishonesty. Predatory lenders have also targeted disadvantaged groups in several circumstances. Loan sharks aren’t the only predatory lenders.
More established institutions, such as banks, finance businesses, mortgage brokers, attorneys, or real estate contractors, are involved in a significant amount of predatory lending. In the years preceding up to 2008, the subprime mortgage boom was undoubtedly an example of predatory lending. To avoid predatory loans, education and investigation are essential.
Make sure you understand any loan agreements you’re signing and figure out how much you’ll owe using the math. But keep in mind that if you are tempted and misled into taking out a loan with greater costs than your risk profile permits or that you are unlikely to be able to repay, you may have been a victim of fraud.
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Common Types of Predatory Loans
1. Subprime mortgages
Home mortgages are the most common kind of predatory lending. Because house loans are secured by the borrower’s real estate, predatory lenders can profit not only from favorable loan conditions but also from the sale of a repossessed home if the borrower defaults. Subprime loans aren’t always regarded as exploitative. Banks would argue that their higher interest rates reflect the higher cost of risky lending to consumers with bad credit.
A subprime loan is risky for borrowers even without deceptive techniques because of the large financial burden it entails. With the rapid expansion of subprime lending arose the possibility of predatory lending. Homeowners with subprime mortgages became susceptible when the housing market plummeted, and a foreclosure crisis triggered the Great Recession. Subprime loans began to account for a disproportionate share of home foreclosures.
Homeowners of color, notably African-Americans and Latinos, were particularly hard hit. Regardless of their income or creditworthiness, predatory mortgage lenders targeted them aggressively in primarily minority neighborhoods. Even after accounting for credit scores and other risk variables like loan-to-value (LTV) ratios, underlying liens, and debt-to-income (DTI) proportions, statistics show that Black Americans, as well as Latinos, were more likely to acquire subprime loans with higher interest rates. During the housing bubble that burst in the year 2008, women were targeted as well, regardless of their income or credit score. Subprime loans were five times more likely to be obtained by black women with the highest earnings than by white men with similar incomes.
Wells Fargo and the Justice Department agreed to a $175 billion settlement in 2012 to reimburse Black and Latinx customers who qualified for loans but were charged higher fees or rates or were unfairly led into subprime loans. Settlements were also paid by other banks.
However, the harm done to black families is irreversible. Homeowners lost not only their homes but also the opportunity to recoup their investment when housing prices rose again, contributing to the racial wealth disparity once more. The Federal Reserve (Fed) reported in October 2021 that the average Black and Hispanic or Latino household earns half as much as the average white household and owns only 15% to 20% of the net wealth.
2. Payday loans are short-term loans
As a bridge to the next payday, the payday lending industry lends billions of dollars in small-dollar, high-cost loans each year. These loans are usually for two weeks and have annual percentage rates (APR) ranging from 390 to 780 percent. Payday lenders operate mostly in financially underserved—and disproportionately Black and Latinx—neighborhoods, both online and in storefronts. Despite the fact that the federal Truth in Lending Act (TILA) requires payday lenders to publish their finance charges, many consumers ignore them.
The majority of loans are for 30 days or less and are used to help borrowers manage short-term obligations. The loan amounts range from $100 to $1,000, with $500 being the most prevalent. The loans are frequently able to be rolled over for additional financing charges, and many borrowers—up to 80%—become repeat clients. Each time a payday loan is refinanced, new costs are imposed, and the debt can quickly spiral out of control. Payday loans increase the risk of personal bankruptcy, according to a 2019 study.
Since the 2008 crisis, a number of court cases have been made against payday lenders in order to promote a more transparent and equitable lending market for customers. According to studies, the market for payday loans has only grown since 2008, with a peak during the COVID-19 pandemic in 2020-2022.
3. Loans secured by a vehicle's title
These are one-time payments based on a percentage of the value of your car. They come with hefty interest rates and the obligation to provide collateral in the form of the vehicle’s title and a spare set of keys. It’s not only a financial loss for the one in every five borrowers who have their vehicle confiscated because they can’t pay back the loan; it can also jeopardize a family’s access to jobs and child care.
Predatory Lending in New Forms
In the so-called gig economy, new projects are springing up. For example, in 2017, Uber, the ride-sharing business, agreed to a $20 million settlement with the Federal Trade Commission (FTC), in part because the platform provided its drivers with auto loans with problematic credit terms. Many fintech companies are implementing “buy now, pay later” options elsewhere.
These products may not always be transparent regarding fees and interest rates, luring users into a debt cycle from which they would not be able to recover.
Is Predatory Lending Being Addressed in Any Way?
Many states have anti-predatory lending legislation in place to safeguard consumers. Some states have outright banned payday lending, while others have set limits on how much lenders can charge. The Consumer Financial Protection Bureau (CFPB) and the US Department of Housing and Urban Development (HUD) have also made steps to address predatory lending.
However, as the latter agency’s shifting posture demonstrates, rules and protections are vulnerable to change. The Consumer Financial Protection Bureau (CFPB) published a final rule in June 2016 imposing stricter underwriting guidelines for payday and auto-title loans. The CFPB then repealed the regulation and delayed additional steps under new leadership in July 2020, significantly undermining federal consumer protections against unscrupulous lenders.
How to Stay Away from Predatory Lending
Continue to educate yourself. Borrowers who are more financially knowledgeable are better equipped to recognize red flags and avoid risky lenders. The Federal Deposit Insurance Corporation (FDIC) offers advice on how to protect yourself when taking out a mortgage, including how to cancel private mortgage insurance (PMI) (which you pay for and which protects the lender). HUD also provides mortgage advice, while the Consumer Financial Protection Bureau (CFPB) provides information on payday loans.
- Before signing on the dotted line, search around for a loan. If you’ve ever been the victim of loan discrimination, you’ll obviously want to get the process over with as quickly as possible. This time, don’t let the lenders win. You will gain an advantage by comparing offerings.
- Think about other options. Consider asking help from family and friends, your local religious group, or public assistance programs instead of a pricey payday loan, which is unlikely to do the same financial harm.
Social Media/Internet Investment Fraud
People may communicate with one another more swiftly and readily than ever before, thanks to social networking on the internet. Investment promoters are increasingly using the internet to locate investors and their cash. A social network is a group of people (or businesses) who share common interests, interests, lifestyles, relationships, beliefs, or other convictions.
Platforms like Facebook, Twitter, LinkedIn, eHarmony, and other social networking sites and communities have made it easier for users to meet, interact, and develop connections with people from all over the world. Con artists join social networks looking for victims, while social networking helps people connect with others who share similar interests or viewpoints.
The con artist establishes credibility and obtains the trust of other members of the group by joining and actively engaging in a social network or community. A con artist can acquire trust and credibility more quickly in online social networks. The scammer gets instant access to potential victims’ internet accounts, which may contain sensitive personal information such as their dates of birth, phone numbers, home locations, religious and political beliefs, career histories, and even personal images.
The con artist takes advantage of how easy it is for people to exchange personal information and background information on the internet and uses it to craft a clever and highly targeted pitch. The con artist acquires access to the first target’s friends and colleagues, allowing the fraud to spread quickly through a social network.
Many of the hallmarks of online investment fraud are the same as those of physical investment fraud. Recognize the following red flags:
- Guaranteed large returns with no risk Many online con artists offer astronomically large short-term profits. Guaranteed returns of 2% per day, 14% per week, or 40% per month are simply too good to be true. Keep in mind that reward and risk are inextricably linked.
- Offshore activities. Because many frauds are based offshore, it’s more difficult for regulators to shut them down and reclaim investors’ money.
- Websites that deal with e-currencies. If you need to transfer money, be cautious when opening an e-currency account. These websites may be unregulated, and scam artists utilize them to hide their money.
- Enlist the help of your friends. Most cons will give you a bonus if you bring your buddies along.
- Professional-looking websites with little to no content. Nowadays, anyone can create a website. Scam sites may appear professional, but they provide very little information about the company’s management, location, or investment specifics.
- There is no written documentation.
Promoters of online scams frequently neglect to offer a prospectus or other written information outlining the hazards of the investment and how to get your money back.
Digital fraud has been a concern for businesses since the introduction of e-commerce in the 1990s, and the threat is growing with each passing year. In fact, according to Exerian, losses due to forged identities climbed from 51% in 2017 to 57% in 2019. According to PwC, corporations have lost $42 billion as a result of these crimes in the last 24 months. More retail sales are moving online, which is impacting the surge in fraud. Card, not present (CNP) transactions, in particular, have exploded in popularity in recent years, accounting for 27% of all debit transactions in 2019 and growing at a rate ten times faster than card-present transactions.
As a result of COVID-19, more consumers are staying at home, and more trade is moving online. This tendency makes it considerably easier for criminals to engage in fraudulent activity. Point-of-sale (POS) lending has also grown in popularity, allowing customers to pay in installments or take out loans for both major and small purchases. While POS lending allows consumers to get approved and make a purchase in minutes, it also allows fraudsters to take advantage.
Consumers are increasingly using peer-to-peer payment (P2P) and eWallet apps, in addition to transacting more in online marketplaces. These apps are most popular in Asia and Europe, but they are also gaining traction in the United States, with 71% of Americans reporting they have used a peer-to-peer payment network. Users use these sites to divide dinner bills digitally with friends, send money to family members in other countries, pay for local vendor services, and more. However, because more than half of P2P transactions are between customers and an unknown entity, the potential of fraud is considerable.
Fraudsters can now more readily access PII (personally identifiable information) and exploit it against consumers as a result of an increase in data breaches in recent years. Fraudsters, for example, blend real and fraudulent data (such as one person’s address mingled with another’s social security number) to construct new, synthetic identities that are more difficult to identify. Then, impersonating actual consumers, fraudsters open bank accounts and obtain credit cards. Once they’ve established good credit, the con artists request higher credit limits or larger loans and then stop paying. Synthetic identity fraud is not only harmful to consumers, but it is also costly to lenders, costing them $6 billion every year. Fraudsters also use PII to take over accounts.
They can get control of accounts and make fraudulent online purchases by exploiting passwords and credentials obtained through data breaches or social engineering. These transactions can range from buying groceries with a debit card to taking out a mortgage with someone else’s account. Consumers face a major threat in the form of account takeover fraud, which Juniper Research estimates will cost more than $200 billion between 2020 and 2024.
With all of these variables contributing to the rise of digital fraud, it may appear that your chances of preventing it are stacked against you. You can better spot and battle digital fraud by abandoning traditional rules-based risk assessment and instead relying on machine learning-based methodologies. Machine learning-based risk assessment can examine global identification data and consumer transaction patterns to determine whether a reputable customer or a fraudulent actor is behind the transaction, while rules-based systems are overwhelmed by massive customer datasets. By carefully evaluating this data and how it is linked together, you will be able to prevent not only scams but also provide a better experience for your clients.
We can easily interact with others and exchange content throughout the world thanks to social media. Con artists take advantage of the same societal advantages to pitch phony investment offers. They can use personal information obtained through social media to target potential investors and even create the illusion of shared common interests.
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How Does Social Media-Based Investment Fraud Work?
Fraudsters may reach out to a large number of individuals at a cheap cost by using social media. They can create phony accounts, email addresses and link their posts to a website, videos, or photographs that make the investment appear authentic. Because of the potential for anonymity on social media, it can be difficult to identify or locate fraudsters who use it to promote a scheme.
People who believe the investment is real may encourage others in their network to invest if a scheme gains traction on social media. Friends, family members, and coworkers may invest in and subsequently promote an unsuitable or fraudulent investment as a result of this. Money is lost, and personal connections are harmed if the investment fails or is dishonest.
Keep an eye out for one or more of the following characteristics of social media investment fraud:
- Unsolicited investment offers
- Makes recommendations that are unbiased and independent.
- Guaranteed large profits with no risk are claimed.
CHAPTER 3: Blacklisted Investment Firms
A person on a blacklist is a member of a group of people who the government or another organization believes cannot be trusted or have committed a crime. Bank fraud is a common way for criminals to gain access to people’s personal and financial data.
Bernard Madoff, the former Nasdaq chairman and creator of the market-making firm Bernard L. Madoff Investment Securities, was arrested on December 11, 2008, by his two sons for running a massive Ponzi scheme. By compensating early investors with money generated from others, the then 70-year-old kept his hedge fund losses disguised. For the past 15 years, this fund has averaged an annual return of 11%. 18 The fund’s alleged strategy, which was credited with these steady returns, was to deploy proprietary option collars designed to reduce volatility. This scheme defrauded investors of almost $50 billion. 19 He was given a sentence of 150 years in prison. At the age of 82, Madoff died in prison on April 14, 2021.
Scott A. Kohn and a company named Future Income Payments LLC (FIP) were both accused of running a Ponzi scam that preyed on pensioners and US military veterans in need of money. Pensioners would pay FIP regularly in exchange for a lump-sum payment or a predatory loan with adjusted annual percentage rates that frequently exceeded 100%. FIP then invited investors to buy “solicited cash flows,” which were the pensioners’ monthly payments to the business. FIP deliberately made steps to disguise the true nature of the transactions from investors, using funds from the most recent investors when making payments to earlier investors to continue the deception. When the firm was finally shut down, more than 2,600 people had been defrauded out of $300 million.
Think Finance, Inc., a Fort Worth-based financial services company, orchestrated a $133 million online payday lending scheme with interest rates as high as 15 times the legal maximum. Shell corporations and Native American tribes were used to hide the company’s loans and lines of credit from state and federal lending restrictions. Think Finance is obliged to pay a nearly $39.7 million settlement to 21 plaintiffs who were victims of its predatory lending after various class-action lawsuits were filed against the company in 2018. Furthermore, the corporation must revoke any existing loans provided to customers at these exorbitant interest rates.
Edward Espinal, the founder of Cash Flow Partners LLC, was recently accused of running a multimillion-dollar bank and securities scam through his company in New Jersey. Espinal implemented the three-year plan by employing flashy internet adverts and hosting instructional sessions to target those with low incomes who wanted to qualify for loans but couldn’t.
The company would then utilize forged documents and fraudulent information to get loans for customers who would otherwise be denied. Espinal committed securities fraud by enticing the victims of his bank fraud scheme to invest their loan proceeds in the company. Rather than investing their money in real estate, international building projects, and a gold mine in Ecuador, as he claimed, Espinal spent it on personal costs, paying returns to previous investors, and marketing his fraud scheme. The Securities and Exchange Commission of the United States has also filed a civil action against Espinal for fraudulently representing that the real estate investment fund was composed of approved securities.
CHAPTER 4: Who Are The Common Victims of Investment Scams?
We’ve all read about investment fraud and swindles. And while most of us think to ourselves, “That could never happen to me” or “I’d never fall for that,” it happens, and we do. Who are the most common victims of investment fraud and scams?
Here are the numbers:
- Victims range in age from 45 to 70 years old;
- the majority are financially aware and educated;
- the majority have higher-than-average salaries;
- and they are generally inquisitive and confident.
Scammers usually approach their victims one by one through referrals or via affinity groups such as clubs, organizations, or places of worship. Because of the possibility of peer influence and the mistaken idea that if other people I know are investing, it must be okay, affinity group frauds are successful.
What is A Pump & Dump Scheme?
In a pump and dump operation, fraudsters circulate false or misleading information to generate a purchasing frenzy, “pumping” up the price of a stock and then “dumping” shares of the stock by selling their own shares at the inflated price. The stock price usually decreases after the fraudsters sell their shares and stop advertising the stock, and investors lose money.
Social networking, equity research sites, investment publications, online ads, email, Internet chat forums, direct mail, papers, magazines, and radio are all potential sources of false or misleading information regarding a company’s stock price. Because there is typically insufficient publicly available information on microcap companies, they are especially vulnerable to pump & dump tactics.
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CHAPTER 5: How To Avoid Investment Scams?
Make prudent online and offline investments. Here are some critical concerns to make when purchasing investment items, as well as how to secure those investments after you have them:
- Be wary of any money manager who demands complete control over all of your funds or who exaggerates his credibility and honesty.
- Select commonplace investments that can be bought and sold through reputable brokerage firms or mutual fund providers. Ensure that your statements are from your brokerage firm and not from a specific money manager.
- Be wary of promises of high or abnormally consistent returns. It’s a red flag if a money manager can’t easily explain his or her investment process.
- When making investment decisions, take your time. Don’t be pushed or forced into making a choice.
- Be wary of phrases like “act now” or “before it’s too late.”
- Say “no” to anyone who tries to persuade you to make a hasty investment decision.
- Obtain a written description of any investment possibility before shopping around for a second view.
- Always make checks payable to a business or financial institution, not to a person.
- Keep track of any account statements and confirmations related to your investment transaction.
- Keep a record of any conversations you have with financial advisors.
- Seek guidance from a third party who is not affiliated with you. Have the investment opportunity reviewed by a licensed investment professional, attorney, or accountant. The majority of money lost to scams and fraud is just lost, and it is sometimes difficult to recover both financially and emotionally.
- If you notice an issue, take action right away. Because time is of the essence, do not be afraid to express your dissatisfaction.
- Don’t be embarrassed or afraid to report financial exploitation or investment fraud.
- Don’t put all your eggs in one basket; diversify your investments by investing in equities, bonds, and cash maintained in federally guaranteed deposit accounts.
Use this quick and easy checklist to protect yourself if you’re presented with an investment offer that you’re unfamiliar with, dubious about, or “sounds too good to be true.”
- Verify if the investment is registered with the securities or insurance regulators in your state.
- Verify that the salesperson is officially licensed and registered with the appropriate state authorities.
We’re all vulnerable to financial fraud and con artists. The criminal’s abilities aren’t employed to pitch the advantages and benefits of a phony investment. The investment is merely a gimmick. Their abilities are just utilized to persuade you to hand over your money. They accomplish this by lulling you out of your natural skepticism and better judgment. And any of us could “fall for it” if that happens.
Don’t Be Fooled by Investments Scams!
Real investments need time and consideration. It’s considered a good idea to consult with someone you trust and who you believe is looking out for your best interests before making an investment. It’s also important to do some research. Begin by renewing your computer’s security features and practicing basic network security on all of the computers you use to access financial accounts. When you’re ready, start looking for appropriate assets.
No one should ever force you into making financial or investment decisions, and you should never invest on the spur of the moment. Don’t give out personal or financial information to an unknown caller, and don’t answer emails or social media messages offering financial advice or investment opportunities; simply hang up or ignore the message. Whether you feel you have given a scammer your bank details or paid money to a fraudster, contact your banking and financial institution as soon as possible to see whether the transactions may be reversed and to ensure that no additional payments to the scam artist are made. Change your passwords to keep your credentials protected. Spread the word to your friends and family to keep them safe.
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