Types of Investment Fraud

This guide covers the most common types of investment fraud, along with details on how each one is perpetrated, warning signs to watch for, and practical steps to stay safe. Fraud schemes range from classic Ponzi or pyramid schemes to newer tactics involving cryptocurrency and binary options. If you suspect that you or someone you know has been the victim of an investment scam involving a financial professional, we strongly suggest you seek legal counsel at once.  Most investment scams follow recognizable patterns. Read through the common investment scams below, and if any of them sound familiar, get help immediately. Ponzi Schemes A Ponzi scheme uses money from new investors to pay returns to earlier investors, creating the illusion of a profitable business that doesn’t actually exist. The scheme is named after Charles Ponzi, who convinced thousands of people to invest in a postage stamp speculation scheme in the 1920s, and modern versions have defrauded everyone from first-time investors to very wealthy people managing multi-million-dollar portfolios. Modern Ponzi schemes operate on the same principle but often involve more sophisticated tactics and larger sums of money. The structure depends entirely on a constant flow of new capital. Once the scheme can’t pull in enough money to keep up, the operator can no longer cover withdrawal requests, and the scheme collapses. It’s the promise of consistent, above-market returns with little or no risk that keeps new investors coming in. Scammers use false promises of steady, above-market gains to lure investors in and convince victims to stay longer than they should. That combination of high returns and low risk is one of the clearest warning signs that an investment opportunity may be fraudulent. Pyramid Schemes Participants at every level of a pyramid scheme hear the same promise: recruit more people, and you’ll earn money. The returns here come from fees paid by each new recruit, with the bulk flowing upward to those who joined earliest. Many pyramid schemes disguise themselves as legitimate multi-level marketing opportunities by attaching a product or membership to the recruitment model. But that’s not where their income comes from. Their income depends primarily on recruitment rather than sales to real customers. Participants at the bottom almost always lose their entire investment money when the scheme runs out of new investors to recruit. One of the biggest pyramid schemes in recent history was OneCoin, a fake cryptocurrency operation founded by Ruja Ignatova. Between 2014 and 2017, OneCoin pulled in an estimated $4 billion from investors worldwide by marketing itself as the next Bitcoin. But in reality, there was no real blockchain, and the coins had no value.  Ignatova disappeared in 2017 and remains one of the FBI’s most wanted fugitives. Her brother Konstantin pleaded guilty to fraud and money laundering charges in 2019. Pump and Dump Schemes You notice a stock getting sudden attention on social media, message boards, or in unsolicited emails. The price is climbing fast, and the posts make it sound like a guaranteed win. What you’re likely seeing is a pump and dump scheme in action. Scam artists accumulate large positions in low-priced stocks (often called penny stocks), then spread false information to inflate the stock price and create artificial demand. Once enough outside investors have bought in and the price hits its peak, the fraudsters dump their shares. The stock crashes immediately afterward. The SEC has pursued enforcement actions against pump and dump operators, but many of these schemes originate offshore, making prosecution and recovery of lost money difficult. Some scammers even claim to have insider information about an upcoming announcement to make the pitch sound more credible. Cryptocurrency markets are especially vulnerable to pump and dump schemes. Low liquidity, minimal regulation, and anonymous trading make them an easy target. A coordinated group can move the price of a small-cap token dramatically in hours, then exit quickly. To protect yourself, be skeptical of any investment generating sudden hype on social media or messaging apps. Look up the asset on SEC.gov or FINRA’s BrokerCheck before putting your money in. And if someone you don’t know is urgently pushing a “can’t miss” stock or token, treat that as a big red flag. Churning Churning is when a broker makes excessive trades in your account to generate commissions for themselves and not returns for you. Your account shows frequent trades, mounting fees, and returns that don’t seem to match the activity. In such a case, you may be experiencing churning, a form of investment fraud where a broker excessively trades securities in your account to generate commissions rather than to serve your financial interests. The practice violates FINRA rules and securities laws, but it can be hard to detect without carefully reviewing your account statements. Warning signs include unusually high transaction costs, a portfolio that turns over constantly, and account losses that don’t align with broader market performance. If you suspect your broker has been prioritizing their commissions over your returns, contact a churning attorney right away to help you identify patterns of excessive trading and pursue recovery through FINRA arbitration. Request a detailed breakdown of all trades and commissions from your firm as a first step. Affinity Fraud What happens when the person recommending an investment is someone from your own church, cultural organization, or professional network? Affinity fraud is when scammers exploit shared identity to gain your trust and steal your money. Scam artists target tightly knit communities and use the trust within those groups to spread their scheme. It’s understandable to feel a sense of security when investment advice comes from someone you know. Fraudsters count on that reaction. They often recruit a respected community leader, sometimes without that person’s knowledge, to promote the fraudulent investment and lend it credibility.  Tip from our investment fraud lawyers: If a friend or community member introduces you to an investment opportunity, verify it independently before committing any funds. Advance Fee Fraud Advance fee fraud starts with an exclusive opportunity. You’re told about what sounds like an incredible deal...