How to Protect Yourself from Investment Scams and Fraud

Investment Fraud

Investment fraud is on the rise according to the U.S. Justice Department.  Middle-class Americans, the elderly, and Christians are big targets. Here’s what you need to know to protect yourself from investment scams and fraud.

What comes to mind when you hear the words investment fraud?  I used to think of the super-wealthy people who invested millions of dollars in funds managed by big-time conmen like Bernie Madoff.

Not any more.

From now on, I’ll think of a retired Christian couple from Ohio whom I recently met.  They lost most of their modest, hard-earned retirement savings to investment advisers in Colorado who defrauded them.

They hosted me in their home when I spoke at their church.  As they prepared our Sunday dinner, I asked them about the RV I saw in their backyard, and how often they liked to go camping.

They replied that they camp a couple of times a year.  Then the 70-something year old husband said, “It’s about all we can do now since our retirement accounts were embezzled.”

I didn’t really feel it was appropriate to ask them to explain the entire situation, but I learned that they thought they had invested their funds with a reputable investment firm based in Colorado.  But they were notified by the feds that the firm was a sham, and their money was gone.

Their funds were never recovered, and to add insult to injury, the scammers got just a couple of years in prison and a fine of a couple of hundred dollars.

What is Investment Fraud?

Investment fraud, also known as securities fraud or stock fraud, is a deception that induces investors to buy or sell securities like stocks, bonds, stock options, mutual fund shares, commodities, and futures on the basis of false information, frequently resulting in losses.

There are several types of investment fraud.  Here are some of the more common ones:

Pyramid Schemes

Pyramid schemes are purported investment opportunities that promise profits based on the investor’s ability to recruit other individuals to join the program — as opposed to profits based on actual sales or investment results. Eventually, the scheme gets too big and collapses because the fraudster becomes unable to pay everyone on the top of the pyramid.

Ponzi Schemes

Ponzi schemes operate on the same “rob Peter to pay Paul” principle like pyramid schemes, where money from new investors are used to pay off earlier investors. The difference is that the victims typically don’t know how their money will supposedly be invested and bring a return. Bernie Madoff is the most famous Ponzi scheme fraudster to date, bilking upwards of $50 billion from investors.

Pump and Dump

This is a fraud where a promoter makes false positive statements about a stock he or she owns, often using several lines of communication like press releases, bulletin boards, chat rooms, etc. After this “pump” of his stock, the promoter then sells his or her own shares for a profit — the “dump.”

How Big a Problem is Investment Fraud?

Investment fraud has been on the rise in recent years due to the bad economy, according to the Department of Justice. One sign of that is that many perpetrators are accused of using proceeds for their personal expenses such as mortgage payments, home furnishings and school tuition bills, instead of luxuries like fancy cars, boats and vacations.

Over the last two years, the federal government prosecuted 500 investment fraud cases that targeted 800 defendants and involved more than $20 billion in fraud.

‘‘We see it as a growing problem. We see it as a serious problem,’’ according to Connecticut U.S. Attorney David Fein in an interview with As a result, the DOJ has begun to host regional investor summits across the country this fall to warn investors about these scams.

How are Victims of Investment Fraud Targeted?

The victims of investment fraud are typically middle-class Americans.  The elderly and Christians or others with religious affiliation, are increasingly being targeted in something the government calls “affinity fraud.”

According to the SEC, “Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups.” The fraudsters who promote affinity scams frequently are, or pretend to be, members of the group and they exploit the trust and friendship that exists.

Sadly, many Christians fall for these scams because we want to believe we can trust others who call themselves Christians and we let our guard down regarding a deal that might sound too good to be true.

Also, if someone appears to be a successful financial investor, it may look to us like God is “blessing” them with success and high rates of return . . . . So why wouldn’t we want to get in on that blessing from God too?

How to Protect Yourself from Investment Fraud

I asked one of my mentors, who is an extremely successful financial advisor and a Christian, for some tips on how people can best protect themselves from investment fraud. Here are a few of his recommendations:

1. Check Out Everything

Today it is easier than ever to check out financial advisors and investments. The first thing you should do is Google the advisor and the products they sell or promote. Then check to see if they are registered with the SEC and FINRA and if any complaints have been filed against them.

2. Invest Only with a Reputable Third-Party Company

Don’t give your money to someone who says they’re going to manage and invest it within their own funds or accounts. Insist that it be managed and invested in a custodian account that is in your name and held by a reputable brokerage. Be sure you receive investment statements directly from that brokerage each quarter.

3. Don’t Fall for the Promise of Spectacular Profits or “Guaranteed Returns”

You’ve heard it before but it bears repeating: If it sounds too good to be true, it probably is. While many fraudsters make big promises that raise red flags in your mind, some promote only slow and steady growth.  So always be on your guard.

4. Make Sure Everything is in Writing

Be suspicious of any investment opportunity that is not in writing. If someone tells you they don’t have time to put it in writing, or that you must kept it a secret, that’s probably a good sign that you should stay away.

5. Take Your Time

Don’t feel pressured or rushed into buying anything. Be skeptical of “once in a lifetime” opportunities, especially if it is based on “inside” or confidential information.

Have you ever been a victim of investment fraud, or are you familiar with any cases that victimized Christians or churches?  Please share your experiences.

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  1. Victoria

    Thank you ever so much for this brilliant advice! To heed 100% and share with as many people as you can! God bless you!

  2. joe

    Whether you have made a good investment will not be known until cash out time comes years from now.

    I had a Prudential agent come over, take the equity out of my paid up $5,000 whole life and used it to purchase a $50,000 whole life. The premium for 20 years would be what I paid on the smaller policy. After my equity was burned up in a few years, the anticipated premium was not $100 but $900 a year. So, it was the same price as if I just bought another policy. However, there was a class action suit against Prudential for “churning.” I ended up with a paid up $50,000 policy after paying for 10 years. $400 cash and 36 shares of Prudential stock. Not too shabby. But the point is, these companies are doing a lot of things to benefit themselves and not the client.

    In 2012 Goldman Sax was selling investments and then betting against those investments so the company would profit. Derivatives (one of the causes of the crash) were really investment insurance. It was not called insurance to avoid the rules for insurance and protect clients.

    Watch 60 Minutes on TV where investment counselors admit they sold financial instruments they did not understand themselves.

    These days, I only invest in myself. I have little side line businesses where I know what is going on.

    I cannot see how a company says they will pay me 5% and no one ever asks how the company makes money.

    I know for a fact that 7% of every dollar you put in an annuity is a commission for the agent. Less than 1% of annuities are annuatized. Most often, they roll over to the next generation.

    My wife had $2,000 in an annuity. After 8 years, matured to $2,600 and now receives a flat 4%. We know that we would not get that return in a bank. So why cash it in? We cashed it in before there is a run on the insurance company and they cannot pay everybody.

    Get ready for a double dip. Social Security started in the Depression around 1935 and was 1%. That was the double dip at that time. Obama Care will be another tax and cause another dip because people will have that much less to invest.

    There is no free lunch.

    I would like to see an investment where the company gets 20% of my profit ONLY after I cash the investment. It will never happen.

    • Rich - MoneyWisePastor

      Joe, I’m sorry to hear of your experience with that brokerage, but glad that you were able to recover! I really like your point about investing in yourself! Like you, I am focused on some sideline businesses, including rental property.

  3. Leo Cesna

    I couldn’t agree with your article more. My mother fell prey to the self-interest of an investment advisor in the early 80’s. Fortunately it didn’t result in financial devastation but it did drive me to a life long study of investing.

    For years, I dreamed of developing a transparent, “arms length”, model to help others save for their future. Through “Audacious” prayer and the blessings I’ve received throughout my life I was able to achieve my dream. Now that I am near retirement myself, my only vested interest is to help others avoid costly mistakes.

    God Bless and Merry Christmas!

    • Rich Avery

      Leo, thanks for your reply! And God bless and Merry Christmas to you too!!

  4. JM

    Hi Adam,

    This is really a very timely article I recieved from my inbox. My family has been victimized by an investment fraud in out little city here in the Philippines. Our city is called Pagadian and the investment company is called Aman Futures Trading. Reportedly our money is invested in Okachi Malaysia as a brokerage house for futures and options contract. Thousands upon thousands fell prey into this firm since a lot in our province really have seen several lives have changed due to this.

    The whole investment started this March 2012 and deflated by September 26, 2012. All your tips here and descriptions really happened. I mean, when you described these scams you didn’t miss a thing. You can see long lines of gambling lords, killers, farmers, vendors, snatchers, lawyers, policemen, even pastors lining up in one straight line hoping to invest their money and get 30%-60% of returns after 7-20 days.

    Me and my family alone lost approximately 1.5 Million pesos of fresh funds in the scam. Looking back, I couldn’t blame the people. Because aside from the fact that the investment company is paying well at first, there is also a great lack of financial knowledge.

    Personally, have I only read this blog prior to joining that investment scam I could have saved my family’s money and educated other duped people as well. Hence, finical literacy is really very important.

    Right now, many are still in pain. Frustrated by what happen an several reported suicide incidents are on the rise. This is by far the biggest investment scam that happened in the Philippines amounting to 12 billion pesos.

    Please continue what you are doing, you are really helping a lot.

    • Rich Avery

      JM, I’m very sorry to hear of the pain that your family and many others are experiencing right now, and I pray for God’s wisdom and guidance for you in the days ahead.

    • JM

      Thank you so much Rich. We really need prayers above all. The whole thing is now in the hands of the government but it would probably take a while before justice is serve. Thank you
      Really. :))

  5. Nate Fancher

    Good stuff as always.

  6. joe

    After the crash, I sat around with groups of people at different social gatherings and at the restaurant. Already people were bragging about the paper profit they made by investing is stocks. No one will know if there is a profit until they cash in years from now.

    But these common areas attract investment people. One wanted to sell me an annuity and get a 5% return and another a 16% return. I can’t get a .5% return on a CD. In fact, the bank tells me about the poor yield and directs me to an annuity salesman.

    The bank will not direct me to an annuity salesman unless there is a cut of the action.

    Again, I invest in nothing except myself.

    I have a bachelor school teacher that invested with the most noble purpose. His idea was to leave behind a scholarship fund. He even borrowed against his own home. He was worth 10 million at one time. Now, he is under water and looking at bankruptcy.

    He has avoided bankruptcy so far, but I believe I have the bank’s plan figured out. The bank can’t sell his properties to recover their money. If the bank forecloses, then the bank is liable for the taxes and up keep. In bankruptcy he keeps his house, car and about $28,000 a year. Just enough to keep him off of welfare. Instead of foreclosing, they are using him. He uses his money, time and treasure to manage the property and try to sell it. When He sells it all, then the bank will sue him for the outstanding money and garnish his pension. In this manner, the bank will get back more money.