Common Investment Fraud Schemes

Investment fraud schemes vary, each with its own characteristics, except they share a similar red flag: they look too good to be true. Here are the most common.

Ponzi Schemes

Named after Charles Ponzi, who one hundred years ago touted he could deliver a 50% return within a matter of months for an international investment, the Ponzi scheme entails using funds from new investors to distribute phony returns to earlier investors. Modern-day Ponzi scams entice new investors to invest in opportunities that promise high returns with little or no risk and consistent return distributions that defy the normal fluctuations of the market.

Real Estate Investment Schemes

Sponsors of real estate investments sometimes offer the promise of easy and fast returns, using testimonials of others who boast prior extraordinary returns. They are often pitched as retirement planning alternatives to traditional mutual funds, bonds, and other securities. They are also characterized by financing outside of common bank borrowing—”hard money”—and property “flipping,” where properties are constantly bought and sold for profit in rapid succession.

Cryptocurrency-Related Investments

A relatively new means of investment fraud, cryptocurrency scams entice investors with the skyrocketing values of virtual coins and tokens like Bitcoin. Because they are new to the regulatory framework, they have had an easier time bypassing regulators and duping investors.

Social Media Investment Fraud

Investors should generally be wary of investment opportunities that arrive via social media. The internet’s easy and often friendly access to the public has transformed social media into a platform for investment fraud. The telltale sign is the classic high return for little risk, as well as requests to enlist friends or other social media connections and difficult access to information and direct communication with sponsors.

Promissory Notes

Promissory notes with high interest rates often tempt investors when low interest rates are otherwise prevailing in the marketplace. They are particularly attractive to seniors who subsist on fixed incomes. As with the Ponzi scheme, promissory note red flags are unusually high rates of return that seem out of whack with what the market is yielding, as well as sponsors who are little-known and sometimes non-existent.