The Most Common Investment Fraud Tactics – Part One

When it comes to protecting investments, one of the most useful strategies is awareness. Investors can empower themselves by knowing the basics of the most commonly used investment fraud tactics.

Per the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), three of the most common investment fraud tactics employed by scammers in the United States are known as the “phantom riches” tactic, the “source credibility” tactic, and the “social consensus” tactic. [1]

Each tactic essentially functions by allowing the fraudster to build a false narrative surrounding their supposed investment opportunity, thereby garnering interest and ultimately investment dollars from unsuspecting investor victims.

The Phantom Riches Tactic

The “phantom riches” tactic involves enticing investors with the prospect of gaining an unattainable increase in wealth. [1] An example of this tactic in practice would be a fraudster telling a prospective investor “most of our investors are making $8-9,000 a month off this deal.” [2]

This tactic works by offering investors an opportunity they feel is simply too good to pass up. When fraudsters use the phantom riches tactic, they are lying about the investment opportunity so as to trick investors not into thinking the opportunity is too good to be true, but instead that the opportunity is too good to turn down.

Often, the fraudster also makes the alleged opportunity appear exceedingly easy for investors to become involved with. Prospective investors are led to believe not only that if they participate, their investment will earn them outstanding returns, but also that the investment opportunity requires almost no effort on the investor’s part.

In reality, the fraudster has fabricated the investment opportunity, and their promise of high returns will instead materialize as considerable losses to the investor.

The Source Credibility Tactic

When employing the source credibility tactic, fraudsters also engage in deceit, this time about their true identity and professional credentials. By communicating to the world that the fraudster is a graduate of a well-respected academic institution or has relevant professional experience and/or professional certifications and licenses, the fraudster places themselves in a respected societal position, albeit a patently fake one. [2]

Operating from this supposedly elevated social and professional tier, fraudsters have a much easier time convincing investors to fork over their money, and eventually lose it for good. While this tactic can be challenging to navigate, given the false impressions the fraudster is setting forth, there are many resources available online which prospective investors can use to confirm the identity and licenses actually earned by the purported professional.

The Social Consensus Tactic

Finally, the social consensus tactic involves stirring up investor interest in a scam by falsely stating that “everyone” or certain members of a group have already joined, and that those who have joined are making a great amount of money. [2] In reality, it is unlikely that many members of a group have joined the scheme – yet the mention of the community interest results in a greater sense of trust in the fraudster.

These tactics are just the first three of five main tactics that the SEC and FINRA warn investors to be aware of. Next week, this blog will cover the remaining two most common tactics used by investment fraudsters.

Remember that the first step in protecting assets is knowing the risks, like fraud, which they entail.

Sources: [1] https://www.finra.org/investors/protect-your-money/avoid-fraud [2] https://www.sec.gov/investor/seniors/outsmarting.pdf