How to Avoid Investment Scams

Investment scams have become the costliest form of financial fraud in the US—and one of the most common. According to the Federal Trade Commission, or FTC, Americans lost more than $4.6 billion to investment scams in 2023.

Approximately one in 10 investors will fall victim to investment fraud at some point in their lives, according to researchers at the University of Pennsylvania's Wharton School. One of the most effective ways to protect yourself from investment fraud is to learn more about the most common types and how these schemes work.

How do investment scams work?

While the nuances of most investment fraud schemes differ, nearly all start the same way—with talk of sky-high returns, frequently accompanied by promises of low risk. Often, these schemes can seem quite convincing—even seasoned investors can fall victim to investment fraud.

In some instances, you may be approached by a recent connection you've come to trust. In other cases, you may hear about an investment opportunity on social media, or you might be contacted by someone claiming to be an investment advisor.

Modern investment scams have become increasingly sophisticated, and they involve a variety of assets, from traditional stocks to cryptocurrencies. What makes investment fraud particularly tricky is that these scams are carried out in many different arenas, including on social media, through text messages or unsolicited phone calls, on dating sites—even in person.

Types of investment scams

One of the most effective steps you can take to protect yourself as an investor is to become familiar with the most prolific investment fraud schemes and learn how to identify the most common scams.

1 Pig-butchering schemes

Pig-butchering schemes have quickly become one of the most common financial scams, with many investors losing their life savings. Typically initiated through dating sites and apps, social media and text messages, scammers will adopt fake online personas and spend days, weeks or even months building a relationship with their victims. Their end goal is to convince their targets to deposit money in a fraudulent online trading platform.

To establish trust, victims will initially be encouraged to deposit an insignificant amount of money. The scammer will present the victim with fake reports showing huge returns on the initial investment and will encourage them to invest increasingly large sums of money.

Once the scammers have extracted as much as possible from their victims, the site will be taken offline. If a victim attempts to withdraw their earnings before that occurs, they'll be blocked from doing so. They may even be told they must pay hefty taxes or fees to retrieve their funds—a ploy to bilk victims out of even more money.

2 Pump-and-dump scams

In a pump-and-dump scheme, individuals or groups will hype up a particular stock or another type of asset. Once enough people buy the asset and send its value soaring, the fraudsters will sell their stake at a significant profit, typically leaving other investors in the red.

Pump-and-dump scams increasingly involve new forms of cryptocurrency and non-fungible tokens, or NFTs. Using email and social media, scammers will contact targets and prey on their lack of knowledge about these new asset classes.

Be wary of anyone offering you a hot investment tip—whether online, in person or over the phone. Pump-and-dump scams may be promoted by self-proclaimed investment advisors, everyday investors or even celebrities and social media influencers, who may be paid to unknowingly promote a scam investment.

3 Rug pulls

While rug pulls share many similarities with pump-and-dump schemes, the scammers' methods differ slightly. With this online investment scam, scammers will create a new asset—typically a new crypto token or NFT—then get it listed on a decentralized exchange and pair it with an established coin before hyping up the "opportunity." Investors are lured in through the promise of outsized returns and the appearance of high demand. Once significant funds have been invested, the scammers will pull the asset out of circulation and disappear with investor funds.

It's difficult to verify the legitimacy of any new form of cryptocurrency, but if the value has skyrocketed quickly while trading volume remains light, a rug pull scheme may be underway.

4 Social media scams

This umbrella term refers to any type of online investment scam that's perpetuated through popular social media platforms. Scammers might take over an individual's social media account and encourage their contacts to invest, or they might post videos and messages promising high returns on foreign currency exchanges—commonly referred to as Forex scams. In some cases, celebrities and social media influencers have been paid to unwittingly endorse investment scams.

5 Affinity fraud

Affinity fraud is particularly galling because the fraudsters are—or are pretending to be—a member of the group they're targeting, whether it's a religious denomination, ethnic group or particular workforce. Criminals have also been known to target members of the military, according to the Securities and Exchange Commission, or SEC.

The most common warning sign is an over-the-top appeal to the sense of group identity—for example, claiming that an investment opportunity is tailored to the beliefs or rules of a religious group. They'll also promise guaranteed returns that sound too good to be true—because they are.

6 Ponzi schemes

Ponzi schemes became one of the more well-known forms of investment fraud in the years following the 2009 conviction of Bernie Madoff. Unfortunately, spotting the early signs of a Ponzi scheme is often quite difficult.

The fraudster will give the illusion of sky-high returns by taking new investors' money and giving it to earlier investors, skimming some off for themselves. It appears as if the assets are appreciating when in reality, none of the funds have been invested.

According to the SEC, many Ponzi schemes target seniors, with one notably brazen scheme amassing $1.2 billion through fraud. Seniors who have accumulated savings make common targets, but everyone is vulnerable, particularly those who are isolated or overly trusting.

How to avoid investment scams

Investors should always be on the lookout for common red flags, including promises of guaranteed returns and minimal risk. Likewise, be wary of any unexpected investment-related messages—even if they appear to come from a trusted friend or connection. Exercise caution with online communication, and beware of email attachments and links. If a phone call, email or social media message raises any red flags, end the conversation.

Finally, always conduct thorough research and speak with your financial advisor before making any investments. Before working with a new investment advisor, take time to verify their credentials using the Financial Industry Reglatory Authority, or FINRA, BrokerCheck tool. Legitimate advisors will have a Series 7 and Series 66 license, or a Series 7, Series 63 and Series 65 license.

How to report an investment scam

If you've lost money to an investment scam, it's important to report the matter. While it may be difficult to recoup your losses, the information you share helps regulators and law enforcement pursue the perpetrator and prevent more investors from being scammed.

FINRA suggests taking the following steps if you've been defrauded.

1. Create a record of the details. Include the scammer's name, contact information and a description of the events. Also include any police reports you've filed and a recent copy of your credit report.
2. Report the fraud to regulators. File tips and complaints with the SEC, FINRA and the Commodity Futures Trading Commission.
3. Report the matter to law enforcement and your bank. As soon as possible, file a report with local police and the FBI. Be sure to also notify your bank immediately—they can put safeguards in place to help protect your account from any additional losses.
   
4. Learn about your rights. Contact your state attorney general's office and the nearest US district attorney to learn about your rights and options for recovering your money.
5. Pursue recovery. FINRA suggests filing an arbitration or mediation claim. While there's no guarantee you'll recover your money, the SEC and FINRA are authorized to seek financial restitution for victims of investment fraud.
   
6. Remain vigilant of recovery schemes. Scammers target people who have already lost money to financial fraud, so beware of unsolicited messages from people who promise to recover your money in exchange for an upfront fee.

After you take these steps, follow up with law enforcement and regulatory agencies after 30 days.

Key takeaways

• Know that investment fraud can happen to anyone—even seasoned investors.
• All investments carry some degree of risk. Promises of guaranteed returns and minimal risk should be an immediate red flag.
• Before working with an investment advisor, use FINRA's BrokerCheck tool to ensure they have the appropriate licenses.
• If you believe you've fallen victim to an investment scam, it's important to report the matter. And remember, you're not alone.