Both legitimate brokers and con artists offer many investment opportunities. A legitimate investment can offer excellent returns, while a deal with a con artist is guaranteed to result in financial loss. Con artists typically use the following techniques:
- Promises of a rate of return better than similar investments are paying.
- Guarantee that the investment will not fail
- Insistance that the opportunity to invest exists today only--tomorrow will be too late.
- Promise to send someone to your home to pick up the funds today.
No investment is risk free and certain risks cannot be avoided. However, investors often can protect themselves against unnecessary risks by learning about investments and investing, taking steps to detect and avoid investment "scams" or "swindles".
Scams are sold in many ways. The methods and promotions listed below represent some fof the most risky investment ventures; moreover, they are often illegal.
- Boiler Rooms
- Ponzi Schemes
- Pyramid Schemes
- Drilling for Riches
- Coins and Precious Metals Schemes
- Mortgages and Trust Deeds
- Exotic Investments
These common unreliable operations display impressive sounding addresses and use high pressure salespeople to make thousands of unsolicited telephone calls to potential investors. The term "boiler room" refers to the "heat" and high pressure generated by the callers, as they try to convince investors to send in their money. In most cases, either the company or the product does not exist, or does not operate as represented. If you receive an unsolicited call offering a deal that sounds too good to be true, be careful. It probably is not true, and you are probably talking to a con artist.
In a Ponzi scheme, con artists offer high rates of return on various impressive sounding investments. However, instead of using the funds for investments, a portion of the original money is paid back to investors as their return. Satisfied investors report these high returns to their friends, who in turn invest. In reality, there is no underlying business; the early investors are simply being paid with funds received from later investors. When the scheme collapses, as it always does, current investors lose their money and the promoters often walk away rich.
A typical pyramid scheme involves a few individuals at the top who recruit people to invest in their organization, tempting them with the promise of large sums of money if they bring in others. As more recruits invest, they too are expected to recruit others. Pyramid schemes focus on recruitment and the exchange of money; usually, there is no legitimate product being sold.
Oil and gas well interests are another common investment scam. By acquiring interests in a "proven" oil field or "surefire" wildcat well, investors are promised great riches. Often, however, the wells do not exist or hold no further reserves. Watch out for deals on "ore-bearing" dirt that promise fantastic mineral reserves and profits. These deals may be illegal. Claims of a "secret" or "new" formula for removing valuable minerals from old mines signal a scam.
These schemes attempt to sell "investment grade" coins or gold, silver, and platinum bars and bullion. Con artists claim that the value of the coins or metals will increase dramatically in the future. However, if you send money, no coins or metals are shipped to you. Instead, you are told the coins and metals have been deposited in a vault or bank with an impressive name. Even if they have been deposited, their value is usually much less than was represented to you. The high commissions charged by the seller would require a great increase in the value of the coins or metals before you could break even. Worse yet, the coins or bullion may not even exist; the promoter may simply pocket your money.
This type of transaction involves loaning money to someone who wishes to purchase or refinance real estate. The investor counts on receiving interest payments as the return on the investment, and expects to receive the title to the property if the borrower defaults. More often than not, the borrower is unable to repay the loan. The investor may discover that the property's value does not cover the investment or that the deed was not recorded in the investor's name.
Investors are frequently approached to buy investments that are tied to recent technological developments or scientific breakthroughs. While such investments can be legitimate, often these opportunities are scams dressed in high-tech language. These schemes are designed to take advantage of investors' familiarity with news events.
These red flags should alert you to the possibility of a scam:
- details about the investment are obscure and confusing.
- a fabulous rate of return is promised
- you are pressured to act immediately
- the person offering the investment opportunity is a stranger.