Investment Scams

& Schemes
 What is a Scam?

• Fraudulent or deceptive schemes

• Deceptive scheme or trick used to
cheat someone out of something,
especially money.
 #1 Pyramid Scheme
• A type of financial fraud in which people
pay to join an organization in exchange for
the right to sell memberships to other
people.
• All pyramid schemes eventually collapse,
and most investors lose their money.
 Pyramid Scheme
These are some of the hallmarks of a
pyramid scheme:
• Primary emphasis on recruiting.
• Uses products or services.
• Promises of high returns in a short time
period.
• Easy money or passive income.
• No demonstrated revenue from retail
sales.
• Complex commission structure.
 Why Pyramid Schemes Fail

• When fraudsters attempt to make money

solely by recruiting new participants into a
program, that is a pyramid scheme, and
there is only one possible mathematical
result – collapse.
 Why Pyramid Schemes Fail

• Imagine if one participant must find six

other participants, who, in turn, must find
six new recruits each. In only 11 layers of
the “downline,” you would need more
participants than the entire population of
the United States to maintain the scheme.
This infographic shows how all pyramid
schemes are destined to collapse.
 #2 Ponzi Scheme
• Closely related to a pyramid scheme but
the promoter generally has no product to
sell and pays no commission to investors
who recruit new members.
 Ponzi Scheme
• The term "Ponzi Scheme" was coined
after a swindler named Charles Ponzi in
1920. However, the first recorded
instances of this sort of investment scam
can be traced back to the mid-to-late
1800s.
 Ponzi Scheme

• Ponzi scheme organizers often promise to

invest your money and generate high
returns with little or no risk. But in many
Ponzi schemes, the fraudsters do not
invest the money. Instead, they use it to
pay those who invested earlier and may
keep some for themselves.
 Ponzi Scheme “red flags”

• High returns with little or no risk.

• Overly consistent returns.
• Unregistered investments.
• Unlicensed sellers.
• Secretive, complex strategies.
• Issues with paperwork.
• Difficulty receiving payments.
 #3 Affinity Fraud
• A name for a type of scam that targets
members of a specific demographic.
Perpetrators may attempt to relate to or
exploit characteristics common to the
demographic. Targeted groups can
include the elderly, ethnic groups, and
religions.
 Affinity Fraud
• These scams exploit the trust and
friendship that exists in groups of people.
Because of the tight-knit structure of
many groups, outsiders may not know
about the affinity scam.
• Victims may try to work things out within
the group rather than notify authorities or
pursue legal remedies.
 Affinity Fraud

• Affinity scams often involve “Ponzi” or

pyramid schemes where new investor
money is used to pay earlier investors,
making it appear as if the investment is
successful and legitimate.
 #4 PREDATORY LENDING

• Means imposing unfair, deceptive, or abusive loan

terms on borrowers. In many cases, these loans carry
high fees and interest rates, strip the borrower of
equity, or place a creditworthy borrower in a lower
credit-rated (and more expensive) loan, all to the
lender's benefit.

• Often use aggressive sales tactics and exploit

borrowers’ lack of understanding of financial
transactions. Through deceptive or fraudulent actions
and a lack of transparency, they entice, induce, and
assist a borrower in taking out a loan they will not
reasonably be able to pay back.

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 How Predatory Lending Works
• Predatory lending includes any unscrupulous practices
carried out by lenders to entice, induce, mislead, and
assist borrowers toward taking out loans they are unable
to pay back reasonably or must pay back at a cost that is
extremely above the market rate. Predatory lenders take
advantage of borrowers' circumstances or lack of
knowledge.

• A loan shark, for instance, is the archetypal example of a

predatory lender—someone who loans money at an
extremely high-interest rate and may even threaten
violence to collect on their debts. However, a great deal
of predatory lending is carried out by more established
institutions such as banks, finance companies, mortgage
brokers, attorneys, or real estate contractors.
 Predatory Lending Tactics to Watch Out for
• Excessive and abusive fees.
• Balloon payment - substantial payment at the end of a
loan's term.
• Loan flipping - lender pressures a borrower to refinance,
again and again, generating fees and points for the
lender each time.
• Asset-based lending and equity stripping - lender grants
a loan based on your asset, say a home or a car, rather
than on your ability to repay the loan.
• Unnecessary add-on products or services
• Steering - Lenders steer borrowers into expensive
subprime loans, even when their credit history and other
factors qualify them for prime loans.
 #5 Pump and Dump Schemes
• Fraudsters typically spread false or misleading information to create
a buying frenzy that will “pump” up the price of a stock and then
“dump” shares of the stock by selling their own shares at the
inflated price

• False or misleading information about a company’s stock price may

be spread through sources including social media, investment
research websites, investment newsletters, online advertisements,
email, Internet chat rooms, direct mail, newspapers, magazines, and
radio.
How it works
 How to avoid pump-and-dump schemes
• Know what to look for - Always do your
research to ensure you know what you’re
investing in and that it’s legitimate.
• Ask yourself if it makes sense
• Use common sense - Be wary of
companies that are not yet profitable and
ask yourself why you’d consider investing
in them.
• Consider the source of the hype
 OTHER COMMON SCAMS

• Advance fee schemes

• The prize that will cost you
• Online auctions
• Fraud jobs
• Moneymaking schemes
• Bogus charities
• Scam schools

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 TOP STRATEGIES TO AVOID SCAMS

• Don’t become a victim.

• Investigate strangers who have deals too good to be true.
• Always stay in charge of your money.
• Don’t be fooled by appearances.
• Watch out for salespeople who prey on fears.
• Monitor your investments.
• Report fraud or abuse.
• Do your homework.
• Be wary of door-to-door solicitations.

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