Watch Out for Investment Fraud

One of the best ways to build wealth over the long term is to invest. Wise investments can overcome market downcycles during the long-term, and help you efficiently amass a larger nest egg.

However, not every investment opportunity is a legitimate one. Scammers trying to get their hands on your hard-earned cash can catch you up in schemes that result in losses for you. It is important you became aware of the common signs of an investment fraud and know where to report it.

Online Investment Fraud is Growing

Tamera Van Brunt, the Director of Communications and Investor Education with the Alberta Securities Commission provided some interesting information on investment fraud. One of the most common ways that Canadians are approached with investment fraud is through email. 33 per cent of approaches are made through email.

I found this interesting — and telling. Perhaps you have seen some of the emails. Many of them purport to offer “inside tips” about hot stocks. Some of them are pump and dump scams, where you are encouraged to purchase “cheap” stocks to drive up the price. As soon as the price goes high enough, those behind the scam sell the stocks for profit, and you are left with worthless stocks. Other emails are simply attempts at phishing, trying to get personal information for identity theft or for other purposes.

The popularity of the Internet is growing, and it is increasingly being used as a resource when it comes to investing. From online brokers to investment tips to investing opportunities, many people are using the Internet to become involved with investments. However, this also means that the world of online investing is becoming a gold mine for unscrupulous fraudsters looking to scam you out of your money.

Following “tips” and pursuing investment opportunities that are brought to your attention, out of nowhere, is usually bad idea. You want to make sure that you know where your information is coming from. Clicking on any link in an email that takes you to a website where you enter personal information and buy stocks should be considered suspect. Even if the email appears to come from a respected online broker, be wary; it could be a scammer trying to use the good reputation of a respected company to gain your trust. Instead, if you want to invest, go directly to the official home page and start from there.

Investment Scam Red Flags

Van Brunt also points out that there are some red flags that can serve as warnings signs that you might be dealing with a fraudulent investment. One of the biggest red flags is the promise of high returns with no risk. As always, if something seems too good to be true, it probably is. All investment comes with some level of risk, and there is no way to completely alleviate all of it.

You have to understand that all investment has risk. There are some investments that have lower risks than others and even some, like GICs, that are practically guaranteed. However, these investments with lower risks also come with lower returns. Anyone promising high returns for a low-risk investment is likely scamming you. Potential returns are almost always correlated with your level of risk; in order to see higher returns you have to be willing to take on higher risks.

Additional red flags to watch out for include:

Upfront payments: When you are asked for upfront payments, premiums, or fees, without being offered anything solid in return, that is a definite red flag. While there are some products that are worth paying for, you need to be discerning. Research your options, and be careful of where you are sending your money. Make sure you are dealing with a reputable company first, and don’t send large amounts of money as “buy-ins”, or for “hot tips”, or “insider information”. Pressure to invest immediately: A solid investment now is likely to be a solid investment later. If you are being pressured to make a decision right now, and being told that you are going to miss out, that could be a red flag that you are being approached with a scam. Tax-free and offshore: Some scammers will tell you that your investment is tax-free [except in a tax free account]. This is a lie. At some point, you pay taxes on your earnings. Additionally, you might be told that an investment opportunity is offshore, and that it comes with certain protections. Be wary of these investments, since there is usually dishonesty involved. Flashy or slick appearance that doesn’t hold up: Many fraudsters produce websites, advertisements, and other materials that appear slick and professional at first glance. However, when you look closely, things suddenly don’t seem as legit. Spelling and grammar might be off, or style and flow might be unnatural. Almost no quality information: Finally, watch out for excessive use of buzz words and jargon. Also, be on the lookout for complex diagrams. All of this is designed to make it look like a scammer knows what he or she is talking about. It’s also designed to confuse potential marks. If it is too difficult to decipher what an investment is all about with the information you are given, that could be a sign that you are dealing with a scam. Difficulty finding company information: Another sign that you might be facing a scam is that you can’t find solid information on how to contact the company. You might not be able to find a valid phone number, or there might only be a box for the address, instead of a physical address. You might not be able to find a good email address. If all you are offered is a contact form, it could be a problem.

It’s important to be vigilant and pay attention to the investment opportunities you are presented with. You even need to be careful when taking investment advice from friends, neighbors, family members and co-workers.These people you trust probably aren’t trying to rip you off; they are likely victims as well. You need to be careful before you put any of your money at risk.

If you do run across an investment scam, though, it’s important to report it. Canadian Securities Administrators offers a site where you can report a scam. Because so few Canadians report scams, it is vital that you share your experience and warn others about the dangers of some of the scams out there. Stay on your toes, and be sure to report scams you run across online.