Financial Red Flags and Scams to Watch Out For
While scammers are always inventing new schemes, many of them are variations of classic cons. Here are three common investment scams that frequently target seniors. Recognizing their patterns is key to avoiding them.
Scam 1: The Ponzi or Pyramid Scheme
Named after the infamous fraudster Charles Ponzi, this scheme is a house of cards. The scammer collects money from new investors to pay “returns” to earlier investors. This creates the illusion of a legitimate, profitable investment. The early investors are thrilled with their returns and often tell their friends, which brings in even more new money. The problem is that no real investment is being made. The scheme collapses when the scammer can’t find enough new investors to pay the existing ones, and everyone, except for those who got out very early, loses all their money.
Red Flags:
- Promises of high, consistent returns, regardless of what the stock market is doing.
- Difficulty or delays when you try to cash out your investment.
- Statements that are overly complex or show mistakes.
- Promoters who are not licensed or whose investment is not registered with regulators.
Scam 2: Affinity Fraud
This is an especially cruel type of senior fraud because it exploits the trust and friendship within tight-knit groups. The con artist will target members of a specific community, such as a religious group, a retirement community, an ethnic group, or a social club. They may join the group and build relationships to gain trust before pitching their “investment.” In some cases, they will dupe a respected leader in the group into investing, and that person will then unwittingly recruit others.
Red Flags:
- A promoter who emphasizes their shared connection with you (“We both go to the same church, so you can trust me.”).
- Pressure to invest without doing your own research, with the implication that asking too many questions shows a lack of trust in the community.
- Testimonials from other group members who may not realize they are being scammed.
- An investment that is pitched as an “exclusive” opportunity for group members only.
Scam 3: Pump-and-Dump Schemes
This scam typically involves “penny stocks,” which are low-priced stocks of small, unknown companies. The fraudsters buy up a large number of shares and then spread false and misleading positive information—the “pump”—to drive up the stock’s price. They might use spam emails, fake news releases, or social media posts to hype the stock. As unsuspecting investors buy in, the price skyrockets. The scammers then sell all their shares at the high price—the “dump”—which causes the stock price to collapse, leaving other investors with worthless stock.
Red Flags:
- Unsolicited “hot tips” or stock recommendations received via email, text message, or social media.
- High-pressure tactics urging you to buy a specific stock right now.
- Glorious predictions of exponential growth for a company you’ve never heard of.
To protect yourself from scams and for consumer information, consult the Consumer Financial Protection Bureau (CFPB) and the FTC.
