Investment Fraud: How to Spot It Before It Costs You

The message lands on your phone in the evening. A stock tip from a number you don’t recognize, a return that’s “guaranteed” to double your money, a link to a private group, and a note that the window closes at midnight tonight. Almost every sign of fraud covered below is packed into those four lines.

The red flags

Fraud pitches vary in their details and repeat in their shape. Watch for these.

Guaranteed high returns. Every real investment carries risk. Anyone promising big returns with no chance of loss is wrong or lying.

Pressure to act now. A deadline tonight, a limited number of spots, a price about to jump. Urgency exists to stop you checking.

An unregistered seller. Registration is generally required to sell securities or to be paid for advice. If you can’t find them on BrokerCheck or the SEC’s adviser site, as covered in checking a broker or adviser, you’ve learned what you need to know.

Unusual payment methods. Requests to pay in crypto, gift cards, wire transfers to a person’s account, or anything other than a deposit into a brokerage account in your own name.

Secrecy. “Don’t tell your bank.” “Keep this between us.” A legitimate investment survives a second opinion.

Testimonials in place of documents. Screenshots of other people’s gains, videos of happy clients, a chat full of success stories, and no prospectus, no audited financial statements and no filings on EDGAR that you could read for yourself.

One flag is enough to stop and check. Two or three together should end the conversation.

Pump-and-dump

A pump-and-dump uses a real stock, usually a thinly traded one with a small share price, where modest buying can move the price a long way. The promoters buy shares cheaply. Then they push the stock hard, on social media, in messaging groups, in emails dressed up as research, often with invented news about a deal or a product. New buyers pile in and the price rises. The promoters sell into that buying, and once they’ve sold, nobody is left supporting the price, so it falls back, often fast, and the late buyers are left holding shares worth a fraction of what they paid, with nobody on the other side willing to buy them anywhere near that price.

The signs are an unfamiliar ticker, a sudden wave of enthusiasm from strangers, and pressure to buy before some announcement. You can check whether the company files reports on EDGAR at all. Some promoted stocks file little or nothing.

Impersonation

Some scams borrow a real name. Fraudsters build websites that copy a real brokerage or investment firm, send messages that appear to come from a regulator, or claim to be a registered representative whose name they took from BrokerCheck. The logo is right. The phone number is theirs.

Treat any unexpected contact as unverified until you’ve confirmed it through a channel you found yourself: the firm’s number from your own statement, the regulator’s site typed into your browser. Regulators don’t cold-call investors to sell them anything, and they don’t ask for payment to recover money you’ve lost.

Affinity fraud

Affinity fraud spreads through groups whose members trust each other. Think of a religious or language community, a professional association, a club. The promoter is often a member, or looks like one. Early investors may even be paid returns, out of later investors’ money, and their word of mouth brings in the next wave, which is why these schemes can run for years inside a community before anyone checks the paperwork.

Trust in a person is no reason to skip the checks. The same questions apply to a friend from church as to a stranger on the phone.

Before you pay anything

Ask for everything in writing: what the investment is, who holds your money, what it costs, and how you get it back. Then check registration, both of the person and of the investment, since most offerings of securities to the public are registered with the SEC or qualify for an exemption, and filings or notices often appear on EDGAR. If the answers don’t arrive in writing, or the seller gets impatient when you ask, walk away.

Where to report it

You can report suspected fraud to the SEC through its online tips portal. FINRA takes complaints about brokers and brokerage firms. Your state securities regulator, found through the North American Securities Administrators Association’s list, handles many local schemes and unregistered sellers. Report even if you didn’t lose money. Your report can help stop the next person from losing theirs.

Fraud that tricks you into sending money is one route in. The other is a takeover of the account itself. Securing your brokerage account covers the settings that block it. The course overview for investor safeguards has all four lessons, and how to evaluate a stock shows what real company documents look like, which makes a fake easier to spot.