Investment fraud is very much on the rise. In fact, it's crucial to remember that fraud is not necessarily more present during lean times or times of crisis. It can take place at any time, and happen to anyone.

Investment Fraud Continues to Rise in the US

According to the Federal Trade Commission (FTC)'s Consumer Sentinel Network, the most comprehensive database on fraud trends in the US, Americans filed more than 1.5 million complaints about financial and other types of fraud in 2011, up 63% in just three years.

The Securities Exchange Commission (SEC), which regulates the financial services industry, has admitted it has never examined some of the 3,000 investment advisers registered in the US.  

What's more, the Securities Exchange Commission (SEC), which regulates the financial services industry, has admitted it has never examined some of the 3,000 investment advisers registered in the US.  

These figures suggest that as staggering as the data is for fraud complaints in our country, the number of actual frauds is considerably higher than reported--and the likelihood of the fraudsters ever being investigated and punished--is actually quite low.

Now, not all of that fraud involves investment advisers ripping off customers. But we don't have to tell you how bad it looks in general, and how important it has become for us to be careful and circumspect about whom we invest with and what we invest in.

Add to the mix the fact that, as the Financial Industry Regulatory Authority (FINRA) warns, investment fraudsters target older Americans who are nearing or already in retirement as well as the millions of Baby Boomers who have been accumulating savings through 401(k) plans and personal retirement accounts, and the future of financial fraud seems downright scary.

Victims of Stock Broker Misconduct and Investment Fraud

Photo by diane39/iStock / Getty Images
Photo by diane39/iStock / Getty Images

The victims of stock broker fraud aren't just the elderly or aging, however. Everyone from young professionals to young professional athletes are susceptible, as long as they've got trust to exploit and money to invest. According to FINRA, here are some of the key qualities that make someone vulnerable to investment fraud: 

  • Above-average financial knowledge

  • Above-average income

  • College-educated

  • Experienced a recent health or financial setback

  • Open to listening

That could be almost anyone!

In the aftermath of Bernie Madoff, we've all become a little more vigilant about investment fraud. But then, fraudsters have also adapted and become more clever. hese people are masters of persuasion and deceit.  Again from FINRA, here are some of the most prevalent investment fraud schemes to look out for:

  • The “PhantomRiches” Tactic –dangling the prospect of wealth, enticing you with something you want but can’t have. “These gas wells are guaranteed to produce $6,800 month in income.”

  • The “SourceCredibility” Tactic – trying to build credibility by claiming to be with a reputable firm, or to have a special credential or experience. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn’t produce.”

  • The “SocialConsensus” Tactic – leading you to believe that other savvy investors have already invested. “This is how ___ got his start. I know it’s a lot of money, but I’m in—and so is my mom and half of her church—and it’s worth every dime.”

  • The “Reciprocity” Tactic – offering to do a small favor for you in return for a big favor. “I’ll give you a break on my commission if you buy now—half off.”

  • The “Scarcity” Tactic–creating a false sense of urgency by claiming limited supply. “There are only two units left, so I’d sign today if I were you.”

What Can You Do to Prevent Falling Victim to Investment Fraud?

Investment fraud has been around since the invention of money. Ponzi dreamed up his scheme 100-years before anyone had ever heard of Madoff. The takeaway is that: yes, there are bad people out there who want to scam your money, and it's happening more and more. But yes, you can also do something about it.

The first rule is the oldest and simplest: "If it sounds to good to be true, it probably is."

The second could be, "Invest in who and what you know."

Find an investment advisor you know and trust or who has a great reputation, then do some background-checking of your own. FINRA has a searchable list of baddies here.  If you don't understand something your broker or advisor wants to invest you in, ask questions. Be proactive. A large amount of fraud succeeds because of our own passivity and complicity. Of course, there's such a thing as passive investment income. But that doesn't mean you should ever become a passive investor. 

PA & NJ Investor Fraud Attorneys

Name *

Our securities attorneys have over a decade of experience helping retail investors recover losses from stock brokers and national brokerage firms. We understand complex financial products and appreciate how stressful losing your wealth to an unscrupulous or negligent advisor can be.

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 1-855-462-3330 or by using our online contact form.