Avoiding common investment scams

  • 26 March 2020
  • 10 mins reading time
  • Investors have always attracted fraudsters, but there are steps you can take to reduce the risk of falling prey

  • Some scams may seem bang up to date, but the underlying lure of getting rich quick is timeless

  • Although self-discipline combined with a healthy dose of scepticism is likely to be your best method of defence, taking professional financial advice at regular intervals could also help improve your chances of not being a victim

Where the word “scam” came from is unclear. It’s of American origin, is now widely used even in official UK circles and, colourful though it is, is more properly defined as “fraud”. Or even “theft”.

Whatever name you give it, this is a practice that has long been targeted at investors. And the reason’s not hard to find. An investment, unlike a bank deposit, is something that may be lost. If the scam promoter can claim to have done their best for the client, no crime has been committed.

On a number of occasions, blatant fraudsters have walked free from court having convinced the jury that this is the case.

Are they rich?

So, rule number one is to rely on yourself in the first instance to keep your assets safe, rather than assuming the law will be there to do that for you. In a moment, we’ll look at different sorts of scams, but remember they all rest on one premise – to get you rich quick.

Some are allegedly based on clever foreign currency trading, some on property-related ruses, or on insurance products or offshore bond trading. All supposedly offer market beating returns.

The best antidote to falling for this patter is to recall the advice of Anglo-American investor Max Gunther regarding astrologers, fortune tellers and anyone else claiming to see the future: are they rich? (1) If not, why not? Similarly, why would the scam artist want to share his good fortune with you when he could keep it all to himself?

But just because you’re your own best defence against common investment scams, that doesn’t mean the authorities are not working on your behalf. Action Fraud, the national fraud reporting centre, has a section on its website warning of the signs of fraud against individual investors. (2)

It lists the classic “boiler room” scam, where fraudsters hit the phones and cold call individuals. Action Fraud says, “You’re called by a professional-sounding broker who offers you investment opportunities that involve incredible potential for making profit. They usually propose to sell you shares or bonds, but may also offer other investments including precious metals such as gold, silver or diamonds, wine, art or energy.”

Always remember, when faced with these so-called promises, if it sounds too good to be true, it probably is.

Like a chain letter

Glossy brochures and prestigious town centre offices can all be part of the routine as well. If you’re called, the safest course of action is to hang up; alternatively, you could ask their company name, explaining that you intend to check their authorisation to conduct investment business on the Financial Services Register. (3)

At this point, they will probably hang up.

The most blatant investment scam artists intend simply to steal your money and disappear. A few quick tips:

  • Never give them your bank details.

  • Don’t be impressed by documents printed on high-quality paper with “official” crests and seals,

  • Don’t let yourself be rushed into signing up for this “sure fire” investment.

More sophisticated scammers practise what is known as “teeming and lading” in the UK and a “Ponzi scheme” in the US. (4) Here, investors are indeed rewarded (at least initially), with above-average returns supposedly generated by a brilliant investment strategy.

In fact, the “returns” are drawn from the money paid by the next wave of investors and the next…and so on. Like any chain letter, the scheme will eventually run out of new subscribers and collapse.

The most dangerous of all

One of the saddest aspects of investment scams is the deliberate targeting of older people.

Action Fraud says over-65s are particularly vulnerable to boiler-room fraud.

An outstandingly bad example came with the collapse in the late Eighties of the Barlow Clowes investment group. (5)

Supposedly investing in “gilts” – British Government stock - on behalf of a generally older clientele, Barlow Clowes actually used client money to accumulate a yacht, a French chateau, fast cars and other luxury goods. A classic Ponzi scheme, Barlow Clowes collapsed and founder Peter Clowes went to prison.

Clowes, an unremarkable man in many ways, serves as a useful reminder that it’s from the likes of him that your assets are in danger; more colourful, grand-scale fraudsters such as rogue trader Nick Leeson or those behind the Bank of Credit and Commerce International collapse are unlikely to trouble you.

He also reminds us that scam artists did not always mean to start out that way, but fell into swindling their investors once their strategies failed. Sometimes, they actually believed the scamming was a short-term fix and that they would put everything right in good time.

Those who believe they’re not really fraudsters can be the most dangerous of all.

Alas, there will always be scam victims, for the simple reason that many people want to believe the easy-money yarn, however implausible. “For every credibility gap, there is a gullibility fill.” (6)

Just make sure it’s not you who’s supplying it.

(1) Max Gunther; The Zurich Axioms; Souvenir; 1985





(6) Michael J. Comer; Corporate Fraud; Gower; 1998

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