Protecting Yourself from Fraud and Financial Scams
Identifying potential financial fraud and abuse as well as educating our clients to these risks are responsibilities we take very seriously at The Bedminster Group. A 2015 survey by True Link Financial claims that 36.9% of seniors lose money to scams, financial exploitation, and abuse over any given five-year period. And while hard to quantify, a 2019 study by Consumer Financial Protection Bureau estimated the average loss to victims at $34,000—that number jumped to $46,000 for adults ages 70 to 79.
Although most seniors who experience financial fraud are the victim of friends or family members, older investors are frequently a target for online, mail and telephone schemes. Because some financial frauds are laughably easy to identify, many people feel that only inexperienced investors or individuals lacking financial savvy can be fooled. Nothing could be further from the truth. Many of the criminal enterprises that target individual investors are well organized and sophisticated; it never hurts to reeducate ourselves on the most common scams to avoid. Here are some identified by the Securities and Exchange Commission in their “Guide for Seniors-Protecting yourself against investment fraud.”
“Ponzi” and Pyramid Schemes
These investment scams are essentially “robbing one person to pay another.” Initial investors are paid off with money taken from new investors. As long as a steady flow of new investors keeps coming in, there will be money to pay off the old investors. This early return on investment is misleading, however, because when the new investors stop coming in, the scheme collapses, investors lose their money, and the fraudsters walk away rich’
Oil and Gas Scams
If you think you’ve found the right oil or gas investment to “strike it rich,” consider this: it may be a scam. While some oil and gas investment opportunities are legitimate, many oil and gas ventures are frauds. Many of these schemes start in so-called “boiler rooms,” where skilled telemarketers use high pressure sales tactics to convince you to hand over your hard-earned money. The oil and gas industry is often in the news, and this publicity can be used to lure potential investors and make “opportunities”
A promissory note is a form of debt—similar to a loan or an IOU—that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on the investment. While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. Investors should be careful to determine their legitimacy and should seek the advice of an objective third party when in doubt.
Prime Bank Fraud
In a prime bank scheme, fraudsters often claim investors’ funds will be used to purchase and trade “prime bank” financial instruments or other “high yield investment programs” (“HYIPs”) on offshore markets in order to generate huge returns in which the investor will share. However, neither these instruments, nor the markets on which they allegedly trade, exist. To give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers.
High Return or “Risk Free” Investments
Some unscrupulous investment professionals make unsuitable recommendations to purchase investment products that don’t meet the investment objectives or means of an investor. Unsuitable recommendations might occur when a broker sells speculative investments such as options, futures or penny stocks to a 95-year-old widow living on a fixed income with a low risk tolerance. Investors should be careful to review the risk profile of each investment recommendation and seek the advice of an objective third party when in doubt.
Internet investment frauds mirror the frauds perpetrated over the phone or through the mail. Remember that fraudsters can use a variety of Internet tools to spread false information, including bulletin boards, online newsletters, spam, or chat rooms. They can also build a glitzy, sophisticated web page. All of these tools cost very little money and can be found at the fingertips of fraudsters.
To help you protect yourself, the SEC has some valuable resources you can use. Copies of the publications and brochures listed below are available in both English and Spanish and are available for download at Investor.gov.
•Ask Questions: Questions You Should Ask About Your Investments
• Stopping Affinity Fraud in Your Community
The SEC search tool at Investor.gov allows you to check the registration status and background of investment professionals as well. If you have been a victim of a scam, you can check the SEC’s website (www.sec.gov) for information about SEC actions and investor claims funds.