Investment Fraud

Americans lose millions of dollars each year to fraudulent investments. Many consumers invest large sums of money in illegitimate real estate, telecommunications or other tangible items, such as art or coins. The law of investment fraud is aimed at identifying and eradicating fraudulent investment schemes while teaching the public to recognize investment traps. The Federal Trade Commission (FTC) has the authority to promulgate laws that protect against investment fraud. Additionally, both the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS) take steps to protect consumers from becoming victims of investment fraud.

Types of Investment Fraud

Investment fraud comes in many forms. In its simplest incarnation, an investment scam encourages a consumer to give money to a fraud promoter, also known as a "fraudster," in exchange for a pledge that they will significantly increase their investment in a short amount of time. The consumer is often given some form of a "no risk" guarantee or other promise that their investment is secure. The fraudster then keeps the money and disappears, leaving the consumer with nothing. The most common type of investment fraud is the pyramid scheme. Pyramid schemes encourage individuals to invest in an innovative "opportunity" while also recruiting new members into the scheme. The invested funds are not used to further the opportunity, but are rather circulated to create the illusion of profit where there is none. Another common form of investment fraud is the "pump and dump" scam, in which fraud promoters are paid to create a buzz around certain stock. The fraudsters then secure naive investors, whose investments "pump" up the price of the stock. The fraud promoters then "dump" their shares by selling them at a profit. As a result, the stock price falls and becomes worthless, leaving the investors with nothing.

Real Estate Investment Fraud

Along with a successful real estate market often comes mortgage fraud and other real estate investment schemes. Common scams negotiating inflated appraisals, falsifying identities to obtain loan approvals and forging credit reports.

Why it Works

Fraud promoters typically spend a great deal of time and energy to make their schemes appear genuine. Fraudulent investments are often very similar to legitimate investments, giving the consumer a false sense of security. With the use of aggressive marketing tactics, such as pop-up internet ads, seminars, and television infomercials, fraud promoters are able to reach a large audience. Fraudulent investment schemes also often target vulnerable members of the population, such as the elderly and the uneducated.

Investment Fraud and the Internet

While the internet is an effective and easy way to research investment opportunities, the internet has also become the primary method of promoting investment fraud. A variety of tools are available to induce consumers to make illegitimate investments, including pop-up ads, spam e-mails, online bulletin boards, newsletters and chat rooms. The SEC actively investigates internet investment fraud and recommends that consumers look into a company before making an online investment. The SEC suggests that consumers check financial statements, authenticate the claims of new products, verify the business relationships within the company and probe the backgrounds of the company's owners.