Area of Law: Criminal Law
Answer # 1802
Investment fraudRegion: Ontario Answer # 1802
What is investment fraud?
Investment fraud occurs when someone poses as an investment professional or company and takes your money with the promise of investing it, but uses it for other purposes, and you do not get your investment back. The individual is effectively stealing your money. Both individuals and companies can be victims of investment fraud.
How does investment fraud occur?
Fraudulent investment schemes or scams are often marketed by telephone using high-pressure selling techniques. The Internet and email are also common vehicles for scams and disreputable salespeople. Some of the most elaborate schemes and solicitations may even involve rented offices, colourful brochures and complex legal documents or offers.
In some cases, the criminals may even be legitimate “investment advisors” working for a reputable investment firm. They will convince clients to invest in deals that are not ‘on the books’, promising very high returns for quick, cash ‘investments’. Often, the fraudsters will ingratiate themselves into their clients’ personal lives, befriending them, all in an effort to gain their trust and take their money.
Common types of investment fraud
1. Securities fraud, including stocks, bonds, mutual funds
In this type of scam, the fraudster sells either worthless stocks, bonds, mutual funds, or ones that don’t even exist. They show them fictitious reports of how well the security has done and often approach them for more money saying the stock will continue to increase and to get in while it is relatively low. They base the proposed increase in value on things like new technology, new discovery (like gold mines), or an impending take-over bid.
2. Ponzi or pyramid schemes
In a ponzi scheme, an investor will initially receive large dividends or cash from their first investment. Encouraged, they usually invest even more money. However, the “profits” that are gained from these investments are coming from monies invested by others, just like themselves, as opposed to money made from real investments such as in mutual funds or the stock market. Eventually the fraudsters take off with the money and the victim loses the money they have ‘invested’.
3. Real estate swindles
Real estate scams often involve the purchase of land that the fraudster does not even own, or the purchase of land that does not even exist. In these deals the fraudster (who may even be a licensed realtor), will have legitimate looking property related documents, agreements of purchase and sale, reports of the value of comparable properties, They will put pressure on the intended victim to purchase the property quickly by inventing a story as to why the property is so undervalued, why they are making the offer to the victim, and that it will be sold to someone else. This ensures that the victims do not have sufficient time to go to see the property and conduct proper due diligence with their own lawyer.
4. Boiler room scams – investment in new companies or new product ideas
Another common type of investment fraud is known as boiler room scams, because it is usually done by a team of scam artists who set up a makeshift office, called a boiler room, from which to conduct the scam. They may even set up a fake website, business address, and toll-free number to convince you they are legitimate. The scam usually begins with the victim receiving an unsolicited phone call to buy shares in a private company that is about to be listed on a major stock exchange, and being told that once the company goes public, the value of its shares will increase dramatically. Often, the company is usually in a sector that’s extremely popular, such as alternative medicine or environmentally friendly products. By the time the victim realizes that the company it not real, the criminals will have moved on.
5. Off shore investment scams
These scams promise huge profits or tax savings if the person invests their money off shore in another country. Once the money is sent off shore and is in someone else’s control, it may be virtually impossible to track it down and get it back. If the promised tax savings are fictitious, the victim could also end up owing the government money in back taxes, interest and penalties.
In addition, when money is moved to a foreign country, people are no longer protected by Canadian law and will not have recourse to the Canadian Investor Protection Fund or Canadian courts.
6. Foreign Exchange scams (Forex)
These scams often begin with fraudsters placing ads in newspapers, or on radio, TV or websites. The ads look legitimate and offer an exciting opportunity to invest money on the foreign exchange (forex) market, buy software or sign up for trading courses.
In these scams, the money is usually not invested in anything, but simply stolen. If, however, the money is invested in the forex market, the victim is usually not informed that it is a high risk investment. Again, the victim is likely to lose their money.
7. Pump and dump
Most pump and dump scams start with e-mails sent out promoting an incredible once in a lifetime deal on a stock. What the victim doesn’t know is that the person or company touting the stock owns a large percentage of it. As more and more investors buy shares, the value increases. Once the price hits a peak, the fraudster sells their shares, the value of the stock plummets and the victim is left with worthless shares.
8. Retirement / pension account scam
This scam targets people who have retirement savings in a Locked-In Retirement Account (LIRA). With these types of retirement accounts there are rules about how old you have to be before you can withdraw from them (usually 55) and the amount you can take every year.
The scam is often promoted in newspaper ads as a special RRSP loan that allows people to circumvent the tax laws and use the money in the LIRA. To get the loan, the victim sells their LIRA investment and use this money to buy shares of a start-up company that the promoter is selling. In return, the promoter promises to loan back 60% to 70% of the money invested and keep the rest as a fee. People are told that they will get cash, pay no tax, and still hold a valuable investment in their LIRA. But the investment is most likely worthless, and people usually lose their retirement savings.
9. Affinity fraud
Affinity fraud involves fraudsters targeting groups of people, such as social clubs, ethnic or religious communities, and workplace communities such as unions or the military. The fraudsters will ingratiate themselves into the group with the goal of defrauding members out of their money. In some cases, they may be an established member of the group, they may volunteer, or they simply attend group social events. This is all done to build relationships with influential members of the group in order to gain trust and acceptance.
10. West African / Nigerian letter scam
In a typical letter scam, e-mails are sent from someone posing as a high-ranking government official from a developing country. It’s usually marked urgent or in need of your help. The email says that because of a financial error, they have millions of dollars held in a foreign bank account that they can’t access. The email usually gives a reason why they need the money right away, such as having a sick child, and asks for help to access the funds.
In return, the victim is promised a significant portion of the funds, usually 20%. They ask the victim to deposit a sum of money in the foreign bank account as a processing fee and email or fax their own bank account information so the funds can be deposited there. Once the fraudster has the victim’s banking information, they will usually withdraw all the money in the account.
If you discover you are a victim of fraud, it is a good idea to contact a fraud recovery expert for advice.
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