Articles - Identify – and avoid – investment scams

What to do when an investment sounds “to good to be true”

Investment frauds and scams have ballooned during the pandemic as do-it-yourself investors, staying at home, had more time on their hands to get into trouble. The Canadian Anti-Fraud Centre (CAFC) reports that Canadian lost a reported $380 million to scams and frauds in 2021, with the the highest financial losses occurring through investment frauds, as unwary investors forked over more than $113 million to phony investments, never to be seen again. The CAFC also reported a “noticeable increase in cryptocurrency scams.” So what are the most common types of investment scams, and how can unwary investors protect themselves?

Crypto investment scams

Cryptocurrency has surged in popularity recently, along with online and social media advertisements touting the huge fortunes being made by trading in things like Bitcoin and Etherium. These ads lead to legitimate-looking web pages that involve signing up to a trading platform, transferring funds to your “account,” and then buying cryptocurrency to trade with. More often than not, these are out-and-out frauds. Victims deposit their money and never see it – or any cryptocurrency – ever again.

According to Louis Morisset, Chair of the Canadian Securities Adminstrators and President and CEO of the Autorité des marches financiers, “Fraudsters capitalize on market interest as well as a lack of knowledge in crypto assets to lure both sophisticated and potential investors into scams that can lead to devastating losses.”

There are also many variations of the cryptocurrency scam, and many ways fraudsters work to gain your trust. These range from so-called “romance scams” that end up luring the victim into a fraudulent crypto investment, to compromised or “spoofed” social media or email accounts with messages apparently from friends or acquantances pitching a crypto scam, to bogus initial coin offerings (ICOs).

Crypto scams are only the latest in a long line of investment frauds that continue to be perpetrated on unsuspecting investors.

Advance fee scheme. The scammer sweet talks you into paying a “good faith deposit” or some such to take advantage of a much bigger return later. They always claim this is “refundable” or “returnable” with the first big payout. But the money disappears along with the scammer.

Boiler rooms. These con artists set up temporary companies or offices along with legitimate-looking websites, toll-free numbers, even post-office-box addresses in a tony financial district. But it’s all designed to steal your money. These operations are called “boiler rooms,” and everything about them is fake. They exist only to con as many people out of their money as possible in as short a time as possible (touting non-existent technology, mining, or healthcare companies, real estate schemes, and so on) and then disappear when people start asking questions.

Exempt securities scam. You may receive a pitch to invest in so-called “exempt securities” – that is, securites that may be sold to certain kinds of “accredited investors” (usually with very high net worth) without a prospectus. Such securities are perfectly legal, but are unavailable to most investors. Scammers, however, promise that they can make an exception for you before the investment “goes public,” provided you lie on the paperwork attesting to your net worth and then send them thousands of dollars to “invest.” This is a scam, pure and simple. If you fall for it, your money will be gone forever. Legitimate advisors will never ask you to lie about anything.

LIRA loan scam. The scam preys on older investors who may have substantial Locked-In Retirement Account (LIRA), and may have some need for the funds. You may get this come-on through an online solicitation, an e-mail or text message, a recorded phone message, or even a personal call by a supposed “financial advisor.” The fraud involves dangling the prospect of “unlocking” money from your LIRA, without tax consequences, and then using the proceeds to buy shares of some fake, fly-by-night company offered by the promoter instead. The scheme often involves a promise to “lend” you back a large portion of the funds while keeping the rest as an “adminstrative fee.” In truth, victims of this scam end up with a worthless investment– and no retirement savings. Avoid these types of pitches like the plague!

Ponzi schemes. These schemes recruit people through ads and e-mails that promise the chance to join a special group of investors who are going to get rich on a great investment. The invitation might even come from someone you know. Investors who get into the scheme early may receive high returns fairly soon from what they think are distribution cheques. They’re often so pleased that they invest more money, or recruit friends and family as new investors.

But the investment doesn’t exist. The distributions are paid from the investors’ own money and money from new investors. Eventually, new people stop joining the scheme. There’s no more money to pay out and you don’t see another cent. That’s when the promoters will vanish, taking all the money with them. Even if they are caught, the money is usually gone and very little resitution is made to victims.

How to avoid becoming a victim

The Ontario Securities Commission offers five excellent best practice tips for judging the legitimacy of any investment opportunity you may be offered:

1. Always check registration and enforcement history with your provincial securities commission before investing.

2. Be wary of giving out personal information (including credit card information) by phone or online.

3. Never make a decision on the spot, even if pressured to do so (and the pressure can be intense). Research the offer and review it with your financial advisor. A legitimate investment will still be there tomorrow or next week or next month.

4. Insist that written information (e.g., prospectuses, financial statements, etc.) be sent to you before you give anyone any money. Review them with your financial advisor.

5. Understand completely what you’re getting into, including risks, transaction details, mechanics of trading, reporting, and so on.

For more information on spotting and preventing fraud, check the Canadian Anti-Fraud Centre. Finally, remember the old investing adage, “If it sounds too good to be true, it is.”

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.