According to a 2011 Federal Bureau of Investigation report, securities and commodities fraud investigations have increased by more than 50 percent since 2008.
Securities and commodities fraud include scams such as affinity fraud where victims are preyed upon because they tend to trust others who share similarities such as religion or ethnicity, prime bank investment fraud where investors are offered access to a secret trading market that does not exist, and both Ponzi and pyramid schemes.
Last year, the FBI reported that it was investigating 1,846 cases of this type of white-collar crime. The agency links the increase in fraud with the uncertainty of the financial markets. After 2008, people started looking for new ways to make a higher return on investments.
Abbe Tiger, the Bureau Chief of the New Jersey Bureau of Securities investigates many of these cases.
“The interest rates are very, very low, unfortunately, that people can get on conservative investments and everybody is looking to bring a higher yield,” Tiger said. “But, you must really be careful because instead of bringing a higher yield, you could lose everything.”
Therefore, if one is considering investing with an individual or organization not affiliated with a big financial institution, it is important to keep the following tips in mind:
1. There are no guarantees.
Many people invest their entire life savings because someone promised a guaranteed return. This, however, is one of the biggest red flags when it comes to investment scams.
“When you’re hearing 'guaranteed,' when you’re hearing 'high interest rates,' chances are pretty good that that is not a legitimate investment,” Tiger said. “And, if it is, it is still a very risky investment. Risk and reward go together; the higher the reward, the higher the risk.”
Even if an investor recognizes this red flag, the scammer may still have a few tricks up his or her sleeve.
“It is really hard for anyone to tell what is too good to be true because a good con will make an incredible scam look completely good and completely true,” said Gerri Walsh, the vice president of Investor Education at the Financial Industry Regulatory Authority, or Finra.
To identify if an investment is a scam, Walsh says it is important to get as much information as possible before investing.
“We’ve interviewed some former cons to find out how it is that they are able to carry out their schemes,” Walsh said. “The one thing they will tell you is that if somebody is asking a lot of questions they will stop trying to sell the person on the opportunity.”
2. Do not invest more than you are willing to lose.
It may sound obvious, but this is something authorities see all too often.
“It’s very difficult once you have lost your retirement money,” Tiger said. “Unfortunately, we see a lot of victims of these scams who have had to come back out of retirement and take jobs because they no longer can afford to be retired. Do not give up your entire life savings because it is not worth it.”
Hair dresser and cosmetician Ellen Gabriel lost her retirement fund when she invested with a company called Agape World, Inc., founded by Nicholas Cosmo.
“I invested my IRA. A hundred and thirty thousand dollars, my entire life savings,” Gabriel said.
Nicholas Cosmo told investors like Gabriel their money would be used to fund loans for big real estate developments. In return, investors were offered high interest rates.
However, it was a classic Ponzi scheme. Gabriel and 4,000 other investors lost hundreds of millions of dollars to Cosmo. She now has no savings left.
“Retirement isn’t even an option. Isn’t even an option,” Gabriel said.
To avoid ending up in a similar situation, Finra's Gerri Walsh has a few suggestions.
“One of the things that investors should do to protect themselves in advance is find out how they can get their money back and how much it will cost, because there are often fees you have to pay,” Walsh said. “When you have your money tied up in an investment, know how liquid the asset is.”
It is also important to avoid investing everything in one place.
“Diversify your portfolio so you are spreading out your risk across a variety of investments and different asset classes,” Walsh said. “So if one particular investment does not turn out well or turns out to be a fraud you do not lose everything.”
3. Keep a paper trail.
“Save all your documents, make sure you have everything,” Tiger said.
If it turns out to be a scam, paperwork that correlates with an investment will be needed as evidence to help authorities investigate.
“Keep records of dates, and make sure you don’t give cash. Give checks so that you have cancelled checks,” Tiger said. “You are going to have to provide whatever you can as evidence, in terms of helping the investigation along.”
The more information one can provide, the better.
“Anything that looks as though it could be a violation of our anti-fraud statutes would be referred to our enforcement group, who will then launch an investigation and review the complaining person and any other investors that person may know of,” Tiger said.
4. Report it immediately.
If an investment opportunity starts to raise concerns, do not wait to report it.
“If it turns out that it is not a scam, that is fine,” Tiger said. “But if it is a scam, the earlier the authorities can get in, the better chance we have of at least finding some assets that we can make restitution to people with.”
“The most important thing that investors should do is to complain immediately to a regulator,” Walsh said. “We have an office of the whistle-blower, which is dedicated to handling high risk tips like Ponzi schemes.”
There are a few ways to file a complaint or report a scam. Investors can submit tips by going online to www.finra.org, sending an email to email@example.com, calling the Financial Industry Regulatory Authority toll-free at 866-963-4672, or by contacting the individual’s state securities regulator.
“As soon as you think you may have been a victim of a fraud, you should reach out immediately to your state’s securities regulator and we will investigate,” Tiger said.
5. Hire a private attorney.
After alerting the authorities, both Walsh and Tiger recommend taking individual action.
“You may need to engage a private attorney to get the money back,” Walsh said.
Hiring a private attorney could increase the possibility of recovering some of the lost funds.
“Often times the best way for an investor to get their money back is to bring their own lawsuit,” Tiger said. “That will not interfere with our ability to investigate matters as well. So, we do urge people to do that.”
Usually by the time the authorities have been notified about the scam the money is already gone.
“It may take some time to get your money back,” Walsh said. “It is really difficult in cases of fraud. It is common for investors to get far less than a hundred cents on the dollar and sometimes they get zero cents on the dollar.”
In fiscal year 2011, the FBI ordered $8.8 billion to be paid in restitution, $751 million in forfeitures, and issued $113 million in fines. However, even though the con artist is ordered to pay restitution, it far from guarantees that an investor will get all of the money back.
For those who invested in Nicholas Cosmo’s Ponzi scheme that raked in $400 million, the court ordered Cosmo to pay $179 million in restitution to more than 4,000 victims.
Cosmo pleaded guilty to one count each of mail and wire fraud and was sentenced to 25 years in prison.