FindLaw KnowledgeBasePublished: 2012-10-01
Scams involving investment and broker fraud can cost victims millions of dollars. Knowing the common strategies used by scammers, how to avoid them, and what action to take if victimized can help individuals invest confidently and hold scammers accountable for their dishonest and fraudulent actions.
Common Fraud Strategies
Although it’s rarely easy to spot a scam before becoming a victim of investment fraud, there are a few common tactics used by scammers that you may be able to identify. These tactics are successful because they prey on the victim’s weaknesses. The most popular include:
- The “Phantom Riches” Tactic
- The “Source Credibility” Tactic
- The “Social Consensus” Tactic
- The “Reciprocity” Tactic
- The “Scarcity” Tactic
The phantom riches tactic entices prospective victims with promises of great wealth. For example, they may promise that investing in gas wells will result in thousands of dollars a month in income.
Source credibility is a technique that attempts to persuade victims by impressing them with the scammer’s credentials. Scammers will state that they are the vice president of a prestigious firm or have extensive experienced with investments like the one they are trying to sell you.
The social consensus strategy is reminiscent of the warnings we receive as children: just because everyone else is doing it, doesn’t mean you should. The scammers use the notion that since everyone else is in on this deal to convince victims that they will be missing out if they don’t jump on the bandwagon.
The reciprocity tactic focuses on the scammer doing a favor for the potential victim. For example, the scammer may offer a “deal” on the investment, providing it without the broker’s commission because they “believe so strongly” in the investment.
The final tactic frequently used by scammers involves tricking the victim into believing that the investment is rare and should be acted upon immediately. They will tell prospective victims that the amount of shares available is extremely limited and failure to act will cause them to lose their opportunity to invest.
Steps to Take to Protect Yourself and Your Business from Fraud
There are some simple steps that can help investors avoid receiving contact from scammers in the first place. First, register with the National Do Not Call list. This will immediately weed out a portion of potential scammers. Also, be careful about attending free lunch or dinner seminars and remember the old adage: “if it sounds too good to be true, it probably is.”
The Better Business Bureau also provides a few recommendations to help reduce the risk of becoming a victim. It is important for investors to take their time before jumping into investments. Be wary of any investment that appears to be “risk-free.” All investments have some degree of risk, so any broker or investment advisor claiming otherwise should be a red flag.
Investments that consistently offer high returns should also be avoided, as was the case with the Madoff scheme. Steer clear of returns that are so consistent they appear to be fake. The return data may be manufactured.
A broker or investment advisor should also be able to provide potential investors with information about the risks, obligations, restrictions and costs of the investment. It is prudent to obtain and file a hard copy of this information. Any advisor who is reluctant to discuss the investment strategy or provide these documents should be avoided.
In addition, it is important to ask for the registration status of the broker and investment, and to take the time to check that the broker is licensed and the product is registered.
Avoid investing in commodity futures and currency futures brokerage accounts, since these brokers do not carry protection against bankruptcy. If the investment falls through there are few recourse options available for investors in this scenario.
Consequences of Investment and Broker Fraud
Fraudulent acts on the part of scammers can result in both criminal and civil penalties. Criminal penalties can lead to imprisonment, probation and fines.
Civil penalties focus on returning victims to the same position they were in prior to the fraudulent act. This often includes restitution or monetary payments designed to pay victims back. Civil penalties may also include substantial fines designed to punish the offender for their behavior.
Each situation is unique, and the extent of the penalty depends on various factors including the nature, scope and severity of the scam.
Proving fraud generally requires a victim to establish the following:
- The scammer made a misrepresentation
- The scammer knew that what he or she was saying was false
- The investor or victim justifiably relied on the false statement
- The investor or victim suffered a loss
If you or a loved one is the victim of a fraudulent investment scheme, it is important to remember that you are not alone. The sophistication of recent scams has increased significantly and even professional investors are fooled. Remedies may be available to help you recover your losses. It is wise to discuss your situation with an experienced investment fraud lawyer.