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Ponzi schemes, other investment fraud on rise during pandemic, SEC says

Peter Dazeley

Criminals are defrauding investors in rising numbers as they try to exploit chaos unleashed by the Covid pandemic, the Securities and Exchange Commission said Monday.

Investors should be on high alert for Ponzi schemes, fake certificates of deposit, bogus stock promotions and community-based financial scams, the SEC warned in an investor alert.

“The SEC has recently experienced a significant uptick in tips, complaints and referrals involving investment scams,” the federal agency said.

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Fraudsters use times of uncertainty and change, such as the current Covid-19 pandemic, to lure victims into investment scams,” it continued.

The extent of the increase in fraud documented by the SEC is unclear. A spokesperson for the agency did not return a request for comment.

$16,000 loss

Investment scams promising high returns are a type of “income scam,” whereby con artists target victims who are trying to bring in extra income, according to the Federal Trade Commission. Other examples include work-from-home and employment scams and pyramid schemes.

There was a 70% jump in income scams in the second quarter this year compared with the same period in 2019, according to an FTC analysis of consumer complaint data published Thursday.

Millions of Americans remain unemployed as a result of the Covid pandemic, crippling finances for many households.

The typical American loses more money on investment scams than any other type of income fraud, according to the FTC analysis. Individuals report a median loss of more than $16,000, the agency said.

People in their 50s and 60s are more likely than others to report losing money from investment scams, with a typical loss of $24,000.

Ponzi schemes

In a Ponzi scheme, criminals use money from new investors to pay existing ones. Investment “returns” disbursed to investors consist of money from other defrauded people.  

Some telltale signs of a Ponzi scheme include guaranteed high investment returns, unlicensed and unregistered brokers, and overly consistent returns, according to the SEC.

Fake CDs

Certificates of deposit offer a fixed rate of return, which investors may seek out during periods of market volatility.

But con artists sometimes direct investors to “spoofed” websites that look like those of legitimate financial firms and solicit investment in fake CDs.

Consumers should watch out for companies that offer high interest rates without a penalty for early withdrawal of funds, don’t offer financial services beyond CDs or ask investors to wire money abroad or to an account with a name that differs from the institution, according to the SEC.

Stocks hyping Covid claims

Geber86 | E+ | Getty Images

Investors should be wary of companies that hype their stock by making lofty claims relative to the coronavirus, according to the SEC.

Some firms, for example, may say they are developing a product or service that can help prevent or cure Covid, and that their stock is poised to grow substantially as a result.

These firms may be part of a pump-and-dump scheme, which could cause huge losses for investors, especially if a company makes unreliable claims and stock trading is ultimately suspended, the SEC said.

Community-based scams

Community-based fraud is also known as “affinity fraud.” These cons rely on tight-knit trust within communities and often target people with common ties based on ethnicity, nationality, religion, sexual orientation, military service and age, according to the SEC.

Criminals may be, or pretend to be, part of the targeted group. Investors should research an investment broker’s background, including license and registration status, the SEC advised.

Other telltale signs

Here are some other ways to avoid investment and other income scams, according to the FTC:

  • Avoid high-pressure sales pitches that require you to get involved now or risk losing out.
  • Be skeptical about success stories and testimonials. They may be fake. Online reviews may have come from made-up profiles.
  • Search online for the company’s (or individual’s) name, plus words like “review,” “scam” or “complaint.”

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