People have been finding ways to cheat people out of their investments since before the introduction of modern-day currencies. 

investment fraud schemes

Swindling people out of their hard-earned cash may have been a quick and unethical way of making money for small-time criminals, but it is also a prevalent threat in the business world. Corporations and individuals suffer from investment fraud worldwide.

Investment fraud defined?

Investment fraud involves the sale of illegal financial instruments. This type of crime is usually connected to impossible claims, deals that look too good to be true, or just a mismatch of data. In other words, it lures potential targets to invest their money into a financial strategy that promises to yield them extraordinary results. Sellers use schemes that usually guarantee minimal investment risk coupled with higher than normal returns to entice unwary marks.

Unfortunately, those results never come to fruition, and the investor is left with no money, being often tricked out of their life’s savings.

Investment fraud schemes

Investment fraud can be concealed in a variety of ways — always leaving the victim without their money and the criminal richer for their troubles. So, how exactly do these wrongdoers operate?

Ponzi scheme

It is one of the most popular fraud schemes in the world, producing steady and incredible returns — especially for the earliest of investors. It seems too good to be true because it is. 

The manager of the Ponzi scheme takes the money from new investors, probably invests some of it for legitimacy, but uses a good portion of the funds to pay the older investors their promised “returns”. As long as there is a steady inflow of fresh money, the Ponzi scheme works. However, sooner or later, the amount of money coming in from new investors dries up and it is not even enough to pay the earlier investors their “profits”. 

As the cash flow problem grows to unmanageable proportions, the newest investors are most affected. Eventually, the plan collapses under its own weight, and the investors have lost their investments.

The pump-and-dump

This one is an especially nerve-wracking investment fraud that feeds on the lack of knowledge of the potential investors. This tactic has been so overused in the past, that currently there are special laws that protect stock investors from such a scam. 

Although it might not be as popular as in the past, events like the Gamestop short squeeze remind us that the tactic is still being used by investors trying to make illegal profits in the stock market. 

A pump-and-dump scheme finds ways to artificially increase a stock’s price, then selling shares when the share has risen. For example, by publicly releasing inaccurate information or reporting false recommendations, investors flood the market, causing a buying frenzy. This huge increase in volume decreases supply and drives the share price up — at this point, the organizers sell their share for a hefty profit, while most other investors watch as their investments plummet from their peak price. 

The power of media

Spreading rumors about a certain product, a certain way of making money, has always benefited the criminal underworld. Some con artists are so bold in their claims that they even pay for advertising in the press or other media outlets. Many investment fraud cases can be linked to some sort of online commercial venture.

Even though we might think to ourselves that there are some parties responsible for checking the quality of the advertised product, there is so much publicity that it would be impossible to shut down and remove each ad individually. 

This can be observed in the dropshipping world, where the markup on the original product is very high and oftentimes not on par with the quality of the product. In the world of online learning, people are invited to pay for courses that range from $100 to hundreds of thousands of dollars, promising returns within the first 48 hours. This, of course, is not true. 

Investment fraud online is real.

How to protect yourself against fraud schemes?

As access to the internet provides us with vast amounts of information and new ways of making money, it also introduces the naive, overzealous investor to a whole new world of financial danger. We can do our own research, as con-men prey on the uneducated and uninformed. If we are eager to invest, we should also investigate important documents of the company we would like to support. 

There is no better solution for safe file-sharing than using virtual data room providers. This way, you will feel reassured with the security of your company’s data. Checking their transparency and what kind of deals they made in the past will help you in making a sound decision. 

Fraud is ever-present and waiting to lure an unsuspecting investor. The best we can do is to educate ourselves on the investments we want to make and rely on reputable software like data rooms to keep those investments safe.

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