In today’s financial crisis, stock market scams are alive and well. Many of these schemes prey on citizens’ fears, and the increasing trend for these schemes are running wild with the current financial turmoil that is consuming America. Below are a list of the most famous investment scams and tips on how to protect yourself from them.
Ponzi Scam. During the Great Depression, Charles Ponzi promised to double investors’ money within 90 days. He collected money from investors and paid them off with the proceeds from new investors who entered the scam. Eventually, the last investors who piled in were left with nothing when Ponzi ran off with their money. An off shoot of this scam is also when owners of a business sell off more than 100% of the business to investors in small bite sized pieces. This was the plot of the Broadway musical, “The Producers”, who sold the rights to the show’s profits to investors hoping that the show would tank at the box office so they could pocket the money and not payout anything to the investors.
Nigerian 419. Named after the section of the small African country’s criminal code that handles fraud, the internet scam artists offer would be investors a cut of money they are trying to smuggle out of the country for an upfront fee. A couple of years ago, a U.S. navy officer used some of his ship’s petty cash fund to try and earn a quick profit with this scheme, but he was burned when the Nigerian money was never wired to him. Cash Money Life, one of my favorite personal finance blogs, went into even more details about this scam in a posting.
Pump and Dump. Investors in penny stocks sold on the over the counter (OTC) bulletin boards are often the victims of this scam. Early investors in a cheap penny stock that is too small to trade on a regular New York stock exchange are touted through spam e-mails and internet discussion boards, which creates an artificial buzz about the stock encouraging novice investors to pile in. The scam artists then dump their shares of the thinly traded securities which cause the newly inflated price to plummet for everyone else. This scam was predominantly featured in the movie, “Boiler Room”.
Pyramid Scheme. While not necessarily a stock scheme or scam, I cannot resist adding the pyramid scheme to the list here as well. Pyramid deals seem to attract many spouses looking for a little extra income. The sales force on the bottom of the pyramid does all of the heavy lifting and kicks up a portion of their sales to the top members of the pyramid who signed the bottom levels up. How many people out there have makeup, rubber plates and bowls, vitamins, or designer baskets hidden away in the closet unsold?
How to Protect Yourself. All stock brokers and insurance agents have to be licensed to sell their products and services. You can check to make sure that individuals that you are conducting business with are fully licensed at www.finra.org and www.nasaa.org. Only about 10% of all investments scams and complaints involve licensed dealers. So, checking these websites ahead of time can solve most of your potential problems.