The New Rash of Investor Fraud…and How to Avoid It

By Nick Mango | Updated: November 7, 2019

Technology like crowdfunding and the rise of various, new asset classes including Bitcoin and cryptocurrencies have combined to create some exciting, new opportunities for investors. But recent statements from the North American Securities Administrators Association (NASAA) warn that scammers and con artists are also following the money, and there has been a significant increase in fraudulent activities involving many of these newly popular investments and asset classes.

To help investors spot red flags and discern worthwhile opportunities from scams, Ponzi schemes, and investor rip-offs, here are 4 relatively new types of investments, and the (prominent) threats against which potential investors must now contend:

The new investments that are being targeted by scammers.

Promissory Note Fraud

As it happens, promissory notes top NASAA’s list as one of the foremost emerging threats facing today’s investors. To illustrate the severity of the problem, nearly three out of four regulators cited promissory notes as a leading cause for complaints and/or investigation.

For those not familiar with what promissory notes even are, they are traditionally shorter-term instruments used by businesses to raise capital. Once only available to sophisticated, well-connected, and/or corporate investors, high-yielding promissory notes are now more widely accessible to average investors via the Internet and crowdfunding applications. But because not all promissory notes require securities registration, fraudulent activities are on the rise, and investors are encouraged not to be enticed solely by the promise of high yields, and to always do their due diligence about the company and issuer(s) of the notes.

How to Spot (and Avoid) Promissory Note Scams

  • Be particularly wary of promissory notes with a duration of 9 months or less, some of which may not be registered with securities administrators
  • Conduct thorough research about the company and/or any issuing personnel before investing

Initial Coin Offerings (ICOs) & Cryptocurrency CFDs

Plenty of modern-day investment rip-offs now use Bitcoin and cryptocurrencies as underlying instruments. And inevitably, investors spurred on by stories of early adopters turning $100 worth of Bitcoin into over $137,000 in only a few years are hopeful to cash in on the next potential home-run offering.

Enter initial coin offerings (ICOs), which supposedly bring to market new cryptocurrencies, much like an IPO does with company stock. ICOs, however, are highly speculative at best, and can turn out to be outright scams. Cryptocurrencies themselves, afterall, are not regulated nor secured by an underlying asset or agency, and the ease with which scammers may falsely hype and then sell bogus currencies over the Internet makes this space a hotbed for fraudulent activity and investor rip-offs.

Meanwhile, cryptocurrency contracts for difference, or CFDs, are complex, high-risk, and highly leveraged vehicles that speculate on upcoming price changes in cryptocurrencies like Bitcoin, Ethereum, and others. Perhaps a bit comparable in construction to leveraged, or ultra ETFs—minus the underlying asset, of course—the purchase or sale of CFDs is illegal in the United States, and (probably) for good reason: CFDs are simply not suitable for investment purposes.

How to Spot (and Avoid) Investor Fraud

  • Become knowledgeable about cryptocurrencies, and the risks and opportunities for investors
  • Do not take part in ICOs or invest in cryptocurrency CFDs

Affinity Investment Fraud

While not descriptive of a particular investment, affinity fraud is instead a popular means by which Ponzi, pyramid, or other scammers locate possible victims. By targeting members of identifiable groups—like community organizations, ethnic or religious groups, athletes, the elderly, or various professional groups—fraudsters exploit the friendship, trust, and shared interests and values that tend to permeate these segments to gain continuous access to unsuspecting victims. Many even insert themselves as members of the affinity group, or enlist leading members to help push the validity of their offerings, in the process exploiting and likely stealing from them as well.

Affinity fraud is dangerous and widespread, and it often goes unreported, as tight-knit groups instead attempt to work things out internally. It just goes to show that investment rip-offs are everywhere, and that even among friends, no investment idea can be simply taken at face value.

How to Spot (and Avoid) Affinity Investment Scams

  • Be skeptical of any investments that promise exceptional yields or guaranteed returns
  • Conduct thorough research about the company and/or any issuing personnel before investing
  • Don’t be rushed into making quick and/or uninformed investing decisions
  • Ignore unsolicited E-mails that attempt to hype some new or exciting investment opportunity
  • Don’t trust any investments whose framework and verifiable performance data aren’t in writing

Self-Directed IRAs & Proxy Trading Accounts

Particularly in recent years, scams and investor rip-offs have utilized self-directed IRAs and trading accounts to pilfer funds from unsuspecting investors who believed they could entrust the management of their accounts to unregistered and/or unqualified custodians. To defraud investors, scammers either:

  1. Used self-directed IRAs to hide Ponzi schemes and other fraudulent activity, or…
  2. Convinced investors to trust them to manage their IRAs or trade on their behalf

In either case, mismanagement, misappropriation, or outright theft resulted, and because of the tax implications of self-directed IRAs, it seems that investors were actually slower to react for fear that withdrawing their funds would make them susceptible to income or other taxes.

When it comes to self-directed IRA accounts, scammers are further empowered by the ability to purchase alternative investments including real estate, mortgages, metals, and private placement securities, any of which could be fraudulent in and of themselves.

Meanwhile, scammers who masquerade as expert traders can manufacture fake performance results with relative ease to gain investors’ trust. But because they are unlicensed and unregistered, there are no real safeguards protecting the investor in the (likely) event that the scammer subsequently steals or loses their account capital.

How to Spot (and Avoid) Investor Rip-Offs

  • Conduct thorough research about the company and/or any issuing personnel before investing
  • Never allow unlicensed individuals access to your IRA or brokerage account, nor agree to transfer funds from your account to a self-directed IRA or trading account owned by someone else

So what’s next? Well, why not continue learning about prudent, modern-day investment strategies, as well as common mistakes and pitfalls, in the OTAcademy portal? Click here for more on Investing, from the basics of investing to portfolio management, investment strategies and more.

About the Author
Nick Mango

Nick Mango is a freelance writer and editor whose work in the investing, trading, and financial communities spans more than 12 years. He’s co-author of the book, Traders at Work (Apress, 2013), and has consistently published content across major media outlets and the Web’s most well-known and respected financial portals, including

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