June has come and brought with it a state of calm from the turbulent trading days of May. Summer also brings with it a time for thoughts about vacations to sun drenched shores, and to a degree, a false sense of security as our “fraud guards” are allowed to take a rest, too. Be forewarned. The criminal element in our society waits for times such as these to catch unsuspecting victims with their carefully designed traps. The Internet has become their playground, as the anonymity offered is all they need to disguise their attempts to separate you from your investment capital.
The three most common scams to watch out for have been updated to appeal to the online investing community. Beware of these:
- The Ponzi Scheme: This past year has been riddled with high and low profile arrests of trusted money managers perpetrating this age old scam. Bernie Madoff and Kenneth Starr worked with Hollywood stars, yet used their famous relationships publicly to draw in new referrals who never bothered to question their integrity. New deposits are always used to pay higher returns than market, while the balance is used to support the crook’s extravagant lifestyle. Eventually, especially when markets fall and clients request withdrawals, the stream of new deposits dries up and the criminal activity is exposed. Perform a due diligence review on your bank and stock or forex broker. Always verify credentials and check references. Never rely on a single source of information;
- The “Pump-and-Dump”: This scam can be particularly inviting to anyone believing that insider knowledge is the true path to investment success. In this case the crook acquires a substantial holding in a small-cap or penny stock, and then uses various communication devices to hype up the value of the stock. After carefully planted rumors create the desired demand to increase stock value and liquidity, the crook dumps his stock for a large profit. The unfortunate buyers are left to count their losses as the stock value plummets once the original demand dissipates. Small-cap companies are targeted because manipulation of their prices is an easier task to accomplish than with larger market-capped firms. The latest version of this scam claims an association with BP or government agencies in the clean up of oil spills in the Gulf of Mexico. The SEC has warned investors to be extremely wary of any companies that tout immediate, exponential revenue growth due to BP related contracts. Be skeptical of all unsolicited offers;
- The “Tipster”: A close relative of the previous scam, this criminal attempts to gain your confidence over time before he tries to abscond with your funds. He may provide a free “tip” about the movement of a specific stock the day before trading. When his “tip” is confirmed, he will soon offer another. After he has been right a few times in a row, you now believe he is a “stock guru” with the inside track. He will then approach you with a “sure thing” and ask for your money to invest on your behalf. That is your signal to walk the other way. The Tipster actually has called 100 potential victims, telling half one tip and the other half the opposite. After trade day confirmation, he has 50 new “marks” who believe he walks on water. When he feels he has your confidence, he will ask for money. Don’t fall for this obvious subterfuge.
Equipped with the information above, you, too, can now avoid the clever schemes of today’s most accomplished criminals. Enjoy your summer, and don’t let con artists spoil your fun!