5 types of fraud to watch out for

Key Points

  • Investing scams targeted at retirees are becoming increasingly common
  • Fraud can be difficult to prosecute, so awareness and prevention are key
  • If your parents are on a post-work fixed income, rebuilding lost assets can be more challenging

Financial Fraud Seniors lose $36.4 billion each year to financial abuse — $16.8 billion of which comes from deceptive investing tactics designed specifically to take advantage of older Americans.¹ Also known as “financial exploitation,” this type of investment fraud is defined by the use of misleading language to obtain account information and permission to access the victim’s money.

According to the National Council on Aging, investment fraud targeting seniors has become so widespread that it’s now considered “the crime of the 21st century.”² While financial scams often go unreported, they can be devastating to older Americans who have less time to make up for losses. 

Retirees are particularly vulnerable to investing scams because they often have large amounts of money saved, and “get rich quick” schemes can be appealing to those on a fixed income.

The first step to protecting yourself — or a parent — from investing scams is knowing which red flags to look for.

Here are the five most common types of fraud:

Ponzi scheme

Also known as a pyramid scheme, this involves using money from new investors to provide a return — often much higher than typical market gains — to existing investors rather than using legitimate investment returns. Ponzi schemes fall apart when the money owed to the initial investors becomes greater than the amount that can be raised from new investors. Pyramid scheme operators may reach out via phone, email or word of mouth.

What to watch for: If investment returns seem too good to be true, they probably are. If in doubt, request documentation such as a fund prospectus or the most recent annual report. These may help provide more context for investors — or raise suspicions if they aren’t readily available for review.

Pump and dump

This involves a group of people buying a stock then recommending it to thousands of investors. The result? A rapid spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock sell off their shares at a huge profit when the price peaks. Pump and dump schemes often circulate on internet investing blogs, or you may receive a promotional email.

What to watch for: Smaller, lesser-known companies are more likely to be used in this scheme because it’s easier to manipulate a stock when there’s little or no information available about the company.

Targeting seniors has become so widespread that it's now considered "the crime of the 21st century." - National Council on Aging

Off-shore investing

The internet has eroded barriers that once made it difficult for overseas fraudsters to prey on U.S. residents. Conflicting time zones, the cost of international telephone calls and differing currencies are no longer an obstacle — and international wire transfers can occur instantaneously. Phone calls are a common method of communication for the perpetrators, enabling real-time wire transfers to be made before victims have time to do any research.

What to watch for: Investment opportunities originating in a country that is outside the jurisdiction of local U.S. law enforcement agencies. Ask for legal documentation stating where the funds are registered.

Prime bank

Used in an official capacity, this term describes the top 50 or so banks in the world. Real prime banks often trade high-quality, low-risk investments such as bonds. Fraudsters often claim investors’ funds will be used to purchase “prime bank” investments that they claim will generate significant gains. Because these investments usually don’t exist, investors are unlikely to see their money again.

What to watch for: The term “prime bank” is often used by perpetrators looking to lend legitimacy to their scheme, whereas real prime banks that are easily located through a Google search are able to rely on name recognition alone.

Bulletin boards and newsletters

Investment boards have gone the way of online blogs, where nearly anyone can offer an opinion no matter how qualified they are — or aren’t. While there may be some valid posts by financial experts, perpetrators often use boards to plant fake “insider” tips meant to drive stock prices up or down. Know that company employees can also use blogs to spread promotional information, and it’s not illegal for companies to use employees to write online newsletters to promote their stock.

What to watch for: Federal laws require that disclosures with legally-required details about their offerings are located at the bottom of documents on company-generated information. Fraudulent newsletters are unlikely to provide such language.

Talk to us first

Not sure an investment you’re interested in is the real thing? It’s wise not to make any sudden moves. Your advisor can help determine whether it’s legitimate or explore alternative investments with you.