Inside the Office > Legal Services Division > Securities > Investor Education and Outreach

Common Types of Investment Scams

In today’s complex financial world, there are many opportunities awaiting you. As an investor, your task is to sort out those investments that have the greatest potential in order to meet your personal goals. As a potential investor, you may well find yourself solicited by telephone calls, mailings, door-to-door salespersons, as well as companies on the Internet. The sales pitch will change with the times depending on what scammers think investors will buy.

The primary goal of the Securities Division of the Office of the Attorney General is to protect South Carolina investors from fraud and misrepresentation and ensure as fair a marketplace as possible for the trading of securities in our state. Before you send money to anyone, you should investigate the company making the recommendation, the salesperson, and the investment opportunity by asking questions and checking references. Begin by contacting the appropriate regulatory agencies, such as the Securities Division, the SEC, or FINRA.

The following is a list of the more familiar scams. Many scams are a combination of techniques. Be prepared to deal with investment scam artists.

The Caller Could Be A Crook If…

  • Spectacular profits are promised.
  • High-pressure sales tactics are used.
  • The caller is insistent on an immediate decision, or offers to have a courier driver in your area to stop by your home and pick up your check within minutes of the call.
  • Investment is promised to be guaranteed or without risk. There is no such thing!
  • Recommendations are made based on rumors, tips, inside information, an unannounced new breakthrough, or the caller’s ability to predict future events.
  • Your credit card number is requested for ANY purpose. Requests are typically made for “identification” or “verification” purposes, or merely as an “expression of good faith.”
  • Written information, state securities registrations, or verifiable references are not willingly provided.
  • They suggest that you invest on the basis of trust.
  • Investment opportunities are in another country or are dependent on the participation of an offshore bank.
  • They are reluctant to let you discuss the investment with an impartial third person.

Common Types Of Investment Scams

Ponzi Schemes
Promoters offer high rates of return on various impressive-sounding investments. However, instead of using the money as promised, new investors’ money may be used to pay the monthly ìinterest’, “return”or “dividends” to earlier investors. These “satisfied investors” then report the high returns to their friends, who in turn invest in hopes of achieving the same above-average returns.

In a ponzi scheme, there’s no real underlying business, and investors are asked to buy shares in a business, or sign an “investment contract.” Then, early investors are simply paid with funds received from later investors. In some variations, there may be an underlying business used as a “front” to make the scheme seem more legitimate. These schemes can continue only as long as new investors provide additional funds. When the scheme collapses (as it always does), current investors lose their money and the promoters walk away rich.

Pyramid Promotions
Similar to the ponzi scheme, pyramid promotions focus on the quick profits to be earned from recruiting other investors, who then will recruit others, and so on. Little mention or emphasis is placed on the product or service to be sold. The fraud derives from the ever-decreasing number of potential investors in a given area. The common elements of a pyramid scheme involve the following:

  • An invitation from a friend, neighbor, or co-worker to attend an “opportunity meeting” to earn how to earn lots of money;
  • At the meeting, a well-rehearsed presentation will downplay the traditional methods of acquiring money and will offer instead an exciting shortcut to wealth and adventure;
  • Investors pay large fees for products, courses, etc., or the right to recruit others and profit from their participation;
  • An emphasis on getting others to invest.

Pyramid schemes are illegal in South Carolina, but are difficult to prosecute. Victims’ money is often filtered up through the pyramid and lost.

Prime Bank Notes/Loan Roll Programs
In these investments, promoters offer the “little guy” a chance to pool money with other investors to buy bank notes internationally, often touting a large offshore bank as instrumental in the deal. Investments range from a few thousand dollars to a hundred thousand dollars or more. Returns of fantastic wealth are promised, often in the $100 million range. Details about how the program works are either unavailable or, when examined closely, nonsensical. Investors’ money is rarely recovered. There are no such securities as “Prime Bank Notes.”

Internet/ Cyberspace
An estimated five million U.S. households that already have access to the major online services are being exposed to hundreds of fraudulent and abusive investment schemes, including stock manipulations, pyramid scams and Ponzi schemes. While some experienced persons are now aware of some of the major rip-off techniques now in use, the investment fraud problem could reach epidemic levels over the next few years as several million newcomers crowd onto the information superhighway. Don’t let it be your highway to financial ruin!

Promoters are using the Internet to hawk “risk-free” investment opportunities which are often exotic-sounding investments including eel farms, wireless cable television, prime bank securities, and even fictitious plantations in South America. The “Pump and Dump” scam urges readers to buy a stock quickly that is poised for rapid growth or tells you to sell before it goes down. Often the writer or caller claims to have “inside” information about an impending development, or will claim to use an “infallible” combination of economic and stock market data to pick stocks. In reality, the promoter may be an insider who stands to gain by selling shares after the stock price is pumped up by gullible investors, or a short seller who stands to gain if the price goes down. This ploy may be used with little-known stocks. CONSIDER ALL OFFERS WITH SKEPTICISM.

Bogus “IRS Approved” Investment Schemes
The retirement nest eggs of Americans are in danger of being scrambled by investment schemes falsely promoted as “IRS Approved” or otherwise endorsed by the Internal Revenue Service (IRS). State investment watchdog agencies estimate that tens of thousands of unwary Americans have invested hundreds of millions of dollars of their savings for old age through individual retirement accounts (IRAs), 401(k)s and other tax-deferred retirement savings vehicles that will end up being largely or entirely worthless. In reality, the IRS does NOT endorse any specific investments.

Typical schemes promise sky-high returns of 200% to 800% that will supposedly put investors on “Easy Street” with a bonanza of retirement income. The “IRS Approved” investment schemes range from the latest in high-tech (including wireless cable television and specialized mobile radio) to exotic livestock (such as emu and ostrich farming) to real estate investment “pools.” These new investment schemes have been promoted through slick television and radio ads. Those who respond by calling a toll-free “800” number get a package of materials, followed by high-pressure telephone sales pitches. Fraud investigators speculate that getting victims to call first makes the work of the schemer much easier, since the potential investor has already “bought into” the scheme by taking the first step.

Agriculture And Livestock
The latest schemes in this area involve ostriches and emus. For a fee, you can invest in a pair of live animals for breeding, with the goal of profiting from the selling of the eggs or offspring to zoos or other ranchers. Typically, a management fee is also assessed on a monthly or yearly basis for the boarding and care of the animals. The problem occurs when the predictions don’t match reality or the investment doesnít exist at all. These investments may be accompanied by a “buy-back” or repurchase agreement from the promoter, making it appear that the investment is guaranteed against loss. Read the fine print: many of these people will have used your funds for fees and operating costs and have no money left to “buy-back” your investment. In most cases your money was never to be used for any such venture. It’s just gone.

Coins And Precious Metal Schemes
Promoters offer “investment grade” gold and silver coins, claiming their present value can be independently verified, and promising tremendous future profits, usually based on some current or future political event. For the cost of your investment and a nominal storage fee, the promoter will purchase the coins or bullion for you and have them delivered to and stored in a large, well-known bank, nearly always outside of your geographical area. Often, these promoters promise the opportunity to “leverage” your purchase. Leveraging, in theory, is like buying on margin, in that you only make a down payment toward the total cost of the metal you wish to buy. The rest of the money is advanced or loaned to you, with the precious metal serving as collateral.

The problem with a leveraged purchase occurs when the value of this precious metal goes down. As the buyer, you’re responsible to cover the downturn in value by putting in more money to cover your 20 percent cash down value. If you fail to cover the downturn, your precious metal is sold (often at a discount), and you’re liable for the difference. Leveraging is extremely risky, and not recommended for the small or casual investor.

Some schemes charge extremely high commissions that must achieve a great increase in the value of the coins or metals before you could see a profit. Other schemes donít even bother to purchase the coins or metals. The promoters just take your money and move on to the next town. If you want to purchase precious metals, talk with local merchants who will deliver the goods to you and who have local reputations to protect.

Gold And Silver Mines
These speculative investments typically offer new or secret methods for reclaiming mineral reserves from untested or abandoned mines, or even the recovery of microscopic traces of valuable minerals from soil in your geographic area “where no one else would think to look!” These are classic frauds. Often, the promoter will base a mining forecast on an unknown expert’s geological report or prediction, or will offer part of a valid report out of context. Promoters exaggerate the quality and quantity of the minerals to be extracted, while downplaying the expense or likelihood of recovering them. Canadian investors lost hundreds of millions of dollars in such a scam last year.

Oil Wells and Drilling Equipment Leases
By acquiring interests in a “proven” oil field, or in the immediate vicinity of other proven oil fields, investors are promised “can’t-miss opportunities” for great wealth. These investments are frequently sold to people who live far from the oil company’s headquarters, which may be nothing more than a rented trailer. As with gold and silver mines, promoters frequently offer new and secret methods for reclaiming missed oil reserves on previously drilled oil fields.

Wireless Cable Television
Wireless cable television uses microwave technology to transmit video programming to rooftop antennas of subscribers. You may have seen commercials or newspaper ads touting the high profits to be made from investing in wireless cable television systems. Regulators estimate that investor losses now approach $1 billion.

Investors are targeted through cold-calling, telemarketing, mail offerings, and infomercials. Cable promoters often represent that they have the necessary FCC licenses and are selling shares in a partnership or other venture to develop a wireless cable system. Promoters may, however, misrepresent the actual number of licenses they hold, the number of channels needed for a commercially viable system, or the amount of investment capital needed to fully develop a wireless cable system. It can cost hundreds of thousands of dollars to build even a small system with only four channels and limited programming choices, and costs will easily exceed a million dollars for a larger system with additional channels. It also may be necessary for the promoter to register the partnership units as securities with federal and state securities regulators.

Letter Writers/Public Relations Firms
Letter writers are public relations firms who are paid by stock issuers to promote public awareness of their stock. This creates interest and buying, which increases price.

There are several approaches to generate interest in particular issues. First, and simplest, is the mass mailing of glossy flyers with a return card attached. If the recipient desires more information, they fill out the card and send it in. The card is almost a sure sale, and the public relations firms give the free leads to sales reps. The second approach is to use the Internet, and the third way is a “boiler room” with high-pressure “sales representatives” using “sucker lists” that the public relations firm has used time and time again. The reps rely on these PR firms to pump up the stock because they know prices will rise. Additionally, most promoters who seek out these PR firms often pay reps 15 to 50 percent under the table in cash and the PR firms make large profits.

Advance-Fee Loans
These loans usually are offered to desperate borrowers who have exhausted all of the traditional approaches to financing. Loans are arranged and promised only upon payment of an “up-frontî” or “advance” fee. It’s common for the promoter to represent the source of funds as foreign investors or an offshore bank. Loan amounts are typically very large ($5 – $100 million), and offer long repayment terms at below-market rates of interest. Minimal qualifications, other than the advance fee payment, are not required. The promoter takes the advance fee and never delivers the loan.

Blind Pool Investment Offerings
During prosperous times, potential investors tend to become less cautious in considering investment alternatives, a course of action that can have disastrous results. One type of investment instrument that lures unwary investors is the “blind pool” offering. Blind pools are investment vehicles that raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be. A common form of blind pool is the “blank check” offering. While the blind pool will usually provide at least some indication of what general industry the funds will be invested in, blank check offerings do not identify any proposed investment intent whatsoever. They are literally “blank checks” that the promoter can use at his whim.

Sometimes, however, the promoter knows exactly what he intends to do with the money raised at the time he offers blind pool shares to the public, but chooses not to disclose his intentions for fear that prospective investors might shy away if they “knew too much.” In these cases, it is only the investor who is truly blind to the use of his or her money. Strangely enough, investors let greed cloud their good judgment, and readily agree to commit funds for totally unspecified purposes and with no assurance or commitments.

Blind pool offerings are typically characterized by undercapitalization – having virtually no assets other than the other money obtained through the offering itself. The primary purpose of many blind pools is to raise funds to acquire a private firm that wants to go public without going through the usual regulatory steps; stocks are usually offered at low prices, often under five dollars a share. They are frequently sold by brokers specializing in selling micro-cap stocks (penny stocks).

Loss Reclamation Schemes
One of the meanest type of scams is promoted by companies who offer, for a fee, to recover the money you lost from a previous scam. Of course, these companies use the same “sucker lists” as previous scam artists so they are guaranteed that everyone solicited will have lost money in a prior scam. Don’t throw good money after bad–hang up the phone!

For information on where you can go for help, please see our contact page.

* Please note that neither the Securities Division of the Office of the South Carolina Attorney General nor the SEC makes any kind of recommendation or offers any opinion concerning the quality of the securities being offered through the registration procedure. During the registration process, regulators analyze the prospectus only to ensure that it contains necessary information so that the investor has a good understanding of the offer and can evaluate the risks involved.