Investment scams

Investment scams are nothing new – they have been around for years and come in a variety of shapes and forms. However, they all have the same end result – the investor loses out.

Whilst investment scams can take many different forms, they all rely on the basis of greed – by appealing to each investor at the hip-pocket level.

Who wouldn’t want a fantastic, guaranteed double-digit return in the near future and with very little hassle? Unfortunately, the fairy-tale usually ends there – the scammers take the money and run.

The reality is, there is no such thing as “get rich quick schemes” that work. As Kin Hubbard once said, “The safest way to double your money is to fold it over once and put it in your pocket.”

Investment scams can take a number of forms, but some of the more common are:


Pyramid and Ponzi schemes
These are investment schemes in which investors are promised substantial returns on their investments, usually over a short period of time.

Essentially, with these schemes early investors (at the top of the pyramid) are paid with money from later investors. Eventually these investments fall over when there are not enough new investors to cover the returns of the earlier investors. Whilst Pyramid and Ponzi schemes are similar, there are differences between them.

Ponzi schemes are named after Carl Ponzi, who in Boston in 1920, collected US$9.8 million from over 10,000 people and then paid out US$7.8 million in just 8 months, by offering profits of 50% every 45 days. It eventually collapsed and left many investors out in the cold. Ponzi schemes start off with the appearance of a real investment opportunity which investors contribute to. The scheme grows by word-of-mouth as current investors mention the investment opportunity to others.

The Pyramid scheme involves a person making an investment for the right to receive compensation for finding and introducing others to the scheme. There is an understanding that the success of the investment opportunity is dependent upon attracting new participants.

Useful tip:

Don’t rely on the investment advice of friends – it is a good way to break a friendship. Seek investment advice from trusted investment professionals and make sure you are comfortable with any advice given before acting on it.


Nigerian bank scams – money laundering
Whilst not only limited to Nigerian banks, these scams generally ask for your assistance in transferring a large sum of money. In return for your assistance you will be well compensated. In order to do this, the promoters will ask for bank account details and may also ask that you pay some upfront fees to cover initial costs.

However, once you hand over your account details and pay the upfront charges, nothing else is heard from the individuals that made so many promises.

Useful tip:

Don’t give financial details, in particular account details, to people or organisations you have not heard of before or have no other relationship with.


Overseas cold calling
This is when overseas salespeople phone you and use high-pressure sales tactics to sell shares or bonds. This type of scam is also referred to as a boiler room scam because they are generally run from rented space with desks, telephones, and salespeople who talk to hundreds of people every day.

What are some common signs of this type of scam?

  • High-pressure sales tactics are generally used. Calls can be frequent and aggressive with the salespeople saying that only idiots would turn down such an opportunity.
  • They usually promise large returns for very little risk. Investment opportunities are for products or businesses that are unique or have never been seen before.
  • They usually want a decision made on the spot because there are others who would love to take up the investment opportunity. They don’t want you to think about your decision or take the chance that you might want to seek advice from your investment adviser.
  • They do not provide a lot of information about themselves or the investment.

What can you do to avoid being caught in boiler room scams?

  • Don’t fall prey to high-pressure sales techniques – hang up the phone.
  • Ask if the scheme and individual is licensed in Australia. You can check out the credentials yourself on the ASIC website.
  • Be wary of investment opportunities that do not provide sufficient information or that you do not understand.
  • Never make on-the-spot investment decisions. Take time to think about it, do your own research into investment opportunities, and seek the advice of a professional financial adviser. If the investment opportunity is legitimate it will still be around after you have investigated your options.

Useful tip:

Don’t fall prey to overseas cold callers – it could be the last time you see your money. The ASIC website provides an excellent reference about these types of callers and companies. If you are suspicious refer to this listing or talk to your own financial adviser.


Internet scams
Whilst the internet is a fantastic tool, not everything on the internet is there to help you. There are as many beneficial websites with useful information as there are fraudulent websites, all designed to part you from your hard-earned money.

It is very easy for someone to set up a website that looks good and says all the right things, but in reality is just a front for a dubious investment opportunity.

Internet scams can take various forms, including those investment scams already discussed – Ponzi, Pyramid and Nigerian bank scams. It is also easy for someone to send an email from a fictitious address – so if you do not recognise the name and/or organisation of the sender and the investment opportunity sounds suspicious, ignore the email and delete it.

Useful tip:

Make sure you always know who you are dealing with. If you are unsure, check it out.

As you can see, there is any number of investment scams out there. They take many different shapes and forms, but are all designed to swindle you out of your money. Investment decisions should not be taken lightly and are best made with the help of a trusted financial adviser.

It is very easy for unsuspecting individuals to get caught up with the anticipation of making money quickly. In fact ASIC, as well as other international regulators, has proven this to be the case by setting up dummy investments and seeing who they can attract to their investment scams.

ASIC recently set up a “Millennium Bug Insurance” scam which saw over 200 individuals part with more than $4 million via a fake internet site. These individuals were promised they would triple their money in just over a year by investing in Millennium Bug Insurance which was designed to offer companies insurance against losses from the Year 2000 Millennium Bug. These people did not really know anything about the investment or about the promoters of the investment – but it sounded good.

Useful tip:

Don’t fall prey to investment scams – if it sounds too good to be true then it usually is. Whilst we have run through a number of investment scams, they are just the tip of the iceberg. For more information on other common investment scams for additional tools and tips to help you avoid these investments, visit the ASIC website on www.fido.asic.gov.au. Remember forewarned is forearmed.