Investment Scams

They just keep popping up.

The other day I realized that I don’t just have a house in the country. I have a dandelion farm. And I’ve got a bumper crop this year.

I can mow the lawn and the dandelions are back in all their glory almost before the lawnmower engine is cold. I’ve got this beautifully cut lawn with grass that is 2 inches high, and towering over it is this miniature forest of dandelions that are 6 inches high. How is it that I can cut all the grass, yet miss all the dandelions?

Investment scams are like dandelions. They keep popping up, and until you pull them out by the roots, they just keep coming back.

And, like dandelions, investment scams are right here in our own backyards. There are people getting ripped off right here, right now. These aren’t naïve people that are getting ripped off either. Many of them are smart and sophisticated. And they are still falling victim to scams.

Investment scams come in many colours, and the problem is so pervasive that the BC Securities Commission has set up a special website to educate people. It’s at             The thing about scams is that the good ones appear to be legitimate ventures. You might even know some of the people who vouch for the scam. That doesn’t necessarily mean that these people are the perpetrators of the scam. People who claim the scam is valid are often innocent victims themselves, who haven’t realized that people are going to get ripped off.

If you are approached by someone who wants your money there are a number of red flags that can alert you that something might be amiss.

One of the most obvious red flags is the promise of guaranteed high returns with no risk. High-return, no-risk investments simply don’t exist. Risk and return are inevitably linked. You can have high-return investments. You can have no-risk investments. You can’t have both at the same time. If someone tells you different, hang up the phone.

Another tactic used by scammers is to pressure you to act fast to take advantage of inside information. This is bogus. If they really did have inside information, securities laws prohibits them from sharing it with you anyway. But they don’t have inside information; they are just using high-pressure tactics to get you to make a snap decision. A decision that you will come to regret.

Offshore investing is another popular tactic. Usually this comes with some sort of reference to a tax haven. Don’t fall for it. What offshore investing really means is that you can wave goodbye to your money, because it’s taking a trip and it’s not coming back. Another familiar pitch is to profit like the experts. The claim is of secret techniques, known only by a select group of elite, well-connected, rich dudes. It’s a lie. There is no clandestine prime bank market. The only secret here is whether the guy who steals your money is planning on buying the Porsche or the Mercedes.

Perhaps the trickiest tactic of all – your friends are taking advantage of this great investment opportunity. You think that if your friends think its okay, then it must be legitimate. There are a couple of reasons why this tactic is very effective. You trust your friends. But also you don’t want to miss out on something that they are into.

Here are some examples of common scams. The affinity scam occurs in a group setting, such as a religious group, club or association, or an ethnic group. The scammer will gain trust by joining the group. Once they are accepted into the group there is a natural level of trust because of the common interest shared by members of the group. I’ve seen affinity fraud at the local level on numerous occasions.

The Ponzi or pyramid scheme promises high returns, but inevitably fails. The people who get in early see some results, but those results come from the funds of other victims, not from true wealth creation. More and more participants are needed to support the pyramid until it ultimately collapses. And pyramid schemes always collapse; it’s a mathematical certainty. That’s why pyramid schemes are illegal. It’s an absolute certainty that eventually people are defrauded.

The West African letter scam has been around since before people had email. Postage is expensive though, so nowadays you’ll see this one in your inbox, not your post office box. The scammers allege that due to complications your help is needed moving millions of dollars, for which you will be richly rewarded. Just delete these. Don’t even bother reading them, unless you are amused by spelling and grammatical errors. Trust me, the only time that people that you have never heard of are going to give you money is if you are manning a Salvation Army kettle at Christmas time, and they don’t need to email you to do that.

There are some things that you can do to protect yourself. Know yourself. Determine your investment goals, your risk tolerance, and the limits of your own investment knowledge. Know the proposed investment. Understand where the return on your investment is going to come from, the liquidity, and the risk. Does this fit with your financial objectives? What information is publically available? Is the management competent and reputable?

Know your advisor. Check their qualifications. Are they registered to sell securities? Have there been any disciplinary actions against them? Can they provide references? Understand the pressure tactics used by scammers. Resist these tactics. Be suspicious of payments made directly to individuals or their private companies. Be suspicious of advice to cash out of your current investments in favour of something that you Finally, get everything in writing. And if your instinct is that something is just not right, trust your instincts.

This article was posted in All Columns, Money Management.
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