Types of Investment Fraud


Posted: October 31, 2019

Man being alerted of investment fraudIndividuals and businesses can fall victim to many types of investment fraud, including affinity fraud, advance fees, promissory notes, pre-IPO scams, pyramid schemes, Ponzi schemes, and pump-and-dump fraud.

Smart investing can help a person set themselves up for a comfortable retirement or enable a business to grow and succeed. However, for all the legitimate opportunities that discerning investors can take advantage of, there are numerous fraudsters and imposters waiting to take advantage of people. If you or your business have fallen victim to investment fraud, Reno business attorney Raymond E. Areshenko will fight for justice on your behalf and help you recover compensation.

Here is a guide to the most frequent types of investment fraud.

Common Forms of Investment Fraud

The Federal Trade Commission received more than 1.4 million reports of fraud in 2018. People reported losing more than $1.48 billion to fraud that year. According to FTC data, Nevada was behind only California, Florida, and Georgia for fraud reports in 2018.

Here are the most common types of investment fraud, according to the Securities and Exchange Commission:

  • Affinity fraud: Also known as "wolf in sheep's clothing" scams, affinity fraud takes place when a scammer exploits the trust of a tight-knit community such as senior citizen groups, religious organizations, military service members, or ethnic communities. A fraudster will pretend to be a part of the community to gain members' trust, take their money with promises of wild investment success, then abscond with the cash.
  • Advance fees: In these schemes, fraudsters will pose as financial professionals and offer to buy victims' stock at a price far higher than it's worth — if the victim pays the scammer an up-front fee. This fee is usually disguised as a "regulatory fee," "tax," "finder's fee," or "commission." Once the fee is collected, the victim never hears from the fraudster again.
  • Promissory notes: These are a type of debt similar to a loan that companies use to raise money. Usually, an investor will agree to loan a company money over a set period of time in exchange for a fixed return on the investment. Promissory notes can be legitimate, but most established companies have established relationships with financial institutions for this purpose. Promissory notes marketed to individuals are almost always fraudulent.
  • Pre-IPO scams: These occur when scammers give investors a fake opportunity to buy shares of a company's initial public offering before the business goes public.
  • Pyramid schemes: These scams take place when fraudsters promise astronomical returns in a short period of time. All investors have to do is fork over money and recruit others to do the same. However, pyramid schemes sell no legitimate goods or services. They use money from incoming recruits to pay off earlier investors. Eventually, the money will run out, and the pyramid will collapse.
  • Ponzi schemes: Ponzi schemes are similar to pyramid schemes in that they promise high returns with no risk. The difference is that, instead of the fraudster encouraging victims to recruit more people to the scam, the fraudster acts as a "hub" who continually brings in new investors to pay off earlier ones. These scams collapse when the scammer runs out of money or investors try to cash out.
  • Pump-and-dump fraud: In these scams, a fraudster will intentionally buy shares of a low-priced stock, then spread false information to increase interest in the stock and drive up its price. This is the "pump" phase of the pump-and-dump. Other investors will act on this false information to buy the stock and further increase the price. Then, the scammer will sell their shares at the high cost, leaving the other investors with worthless shares. This is the "dump" phase.1.4 million Americans were victims of fraud in 2018

Tips for Avoiding Investment Fraud

The FBI provides these tips to investors to help them steer clear of fraud:

  • Don't judge a potential investment by a flashy website that could be a facade that was set up quickly.
  • Research your investment opportunity to ensure it's legitimate.
  • Be careful when responding to unsolicited investment offers, especially those that come through email and from outside your country.

Contact Our Reno Investment Fraud Attorney Today

Mr. Areshenko has extensive business litigation experience in both Nevada and California. He has been recognized as a Rising Star by the legal rating service Super Lawyers. Mr. Areshenko will give you a direct, straightforward evaluation of your case, and he will handle your case personally. He is dedicated to helping his clients find the justice they seek.

Start building your case by calling 775-300-7594 (NV) or 916-800-6090 (CA) for a free consultation with REA Law. We serve clients in and around Reno - Sparks and throughout Nevada.  REA Law also has offices in Sacramento servicing California.

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