Please ensure Javascript is enabled for purposes of website accessibility

How to Spot Investment Frauds Before They Rob You Blind

By Kailey Hagen – Dec 10, 2018 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The old adage rings true: If it sounds too good to be true, it probably is.

You receive a phone call from a stranger who is advertising the next big investment. The salesperson explains they're operating on inside information that hasn't yet reached the general public, so now's the time to invest! There's little to no risk to you, and you'll get guaranteed returns in a couple of months. All you have to do is hand over your bank account number, and the company will make sure you don't miss out on the opportunity of a lifetime! It sounds too good to be true, and when you request time to think about it, the salesperson becomes agitated and tells you you'll be sorry if you wait.

How many red flags were you able to spot in that scenario? Investment frauds come in a variety of different forms, from pump-and-dump to Ponzi schemes. But you don't have to know the angle in order to spot a scam when you see one. Here are some red flags to watch for when evaluating an investment opportunity, and what you should do when you come across a scam.

Businessman crossing fingers behind back

Image source: Getty Images.

8 signs of an investment fraud

Here are the most common warning signs of an investment fraud:

  1. Unsolicited offers: Investment frauds may come in the form of a phone call, email, letter, or a stranger showing up at your door. If you have never requested information about the company's products, it's probably a scam.
  2. Guaranteed returns: All investing involves some risk. Be wary of any provider of an investment tip who makes guarantees, promises or assures you that there's no risk involved.
  3. Insider information: Investing based on insider information, which is company information not available to the public, is illegal. No reputable company would use this as a selling point when offering investment products.
  4. High-pressure sales tactics: Scammers want to force you to make a decision now. They know if you're given time to investigate, you could find out that they're not with a legitimate company, so they may try to make you feel stupid for saying no, or create a sense of urgency to force you to invest now. They may employ guilt tactics or appeal to your empathy in order to get you to pony up the money now, no questions asked.
  5. Lack of transparency: If the company cannot provide the appropriate documentation for its securities, or it claims that the investing strategy is too complex to explain, that could be a sign that the scammer is trying to stop you from digging deeper. A real investment company will have all of the necessary documentation and will be able to explain the strategy to you in simple terms.
  6. Special deals: A common tactic scammers use is to pretend to do you a special deal or discount if you'll invest in their product right now.
  7. Unusually consistent returns: Even the best investments have their ups and downs, especially when markets are turbulent. If the purported "investment of a lifetime" keeps going up and up without ever taking a dip, that's a sign that it's too good to be true.
  8. Belittling diversification: No honest investment company would suggest that you place all of your money in a single investment. The risk of loss is too great. But a scammer might urge you against diversification, telling you that this is the only investment you'll ever need.

What to do if you're targeted by a scammer

If you doubt the validity of an investment product or scheme, you have two choices: You can walk away from it, or you can investigate the claims for yourself. Don't make hand over any personal information or money on the spot, no matter what kind of pressure the salesperson applies. If it's a legitimate company, no one will be offended if you want to do research first.

Make sure the company is licensed to sell investments in your state. You can do this by using the Financial Industry Regulatory Authority (FINRA) BrokerCheck tool, or by checking with your state securities regulator. You can also contact the North American Securities Administrators Association (NASAA) and request any information they have on the company that contacted you. If they can't find anything, that's a pretty sure indication that the whole thing was a scam.

It's also a good idea to run an internet search on the company and see what turns up. If the scammers have been around for a while, there's a good chance you'll see their name pop up on consumer protection websites like TrustPilot or A large number of complaints is a good indication that you should stay away.

You may also want to investigate the investment being touted itself. Almost all investment products in the U.S. must be registered with the Securities and Exchange Commission (SEC) before they can be sold to the general public. You can find out if the investment in question is registered by using the SEC's EDGAR database. If it's not, you may want to do some further online research to verify whether it is a legitimate investment.

If your research reveals that the whole thing was a scam, notify the SEC, FINRA, and your state securities regulator or attorney general's office right away, so they can take steps to stop the scammer before they swindle anyone else. 

What to do if you fell for an investment fraud

If you've become a victim of an investment fraud, you should contact the organizations mentioned above, as well as your local police. Give them as much evidence as you have, including any documents you received from the scammer, the name and phone number that they used, and anything else that might help track them down. Follow up with the authorities and regulatory organizations if you have not heard anything after 30 days.

It's also a good idea to pull your credit reports right away. Everyone is entitled to one free credit report per bureau per year through Check for unusual activity on your accounts that you don't recognize; that may be a sign that the scammer has stolen your identity. If you find any, place a fraud alert on your account and notify the credit bureaus and the financial institutions involved.

Investment frauds aren't going away, but by knowing the warning signs and doing careful research on all of your investments, you can ensure that your money stays safe.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.