Signs of Investment Scam

Any of us may be vulnerable to a scam. Understanding the key red flags can decrease our chances of falling into these devious activities. As the saying goes, “prevention is better than cure” or if you may, “better be safe than sorry”, familiarizing signs of these unscrupulous schemes may save you a lot of time and money.

Fraudulent investment activities currently proliferated in our country with the help of social media. Scammers with internet access can now target web browsers of all ages and backgrounds. The incredible level connectivity makes their crafty stories penetrate our screens very easily.

Remember that it’s probably a scam when you encounter the following:

Offers that sound like “tomorrow will be too late” or “there’s a long wait list of people who will invest”

Con artists will lure you with their amazing presentations combined with some fairly valuable freebies. They usually carry themselves really well – they are the so-called “expert money makers”. This facade is important because they want you to decide to invest on the spot or within the next 48 hours. Their goal is to build an impression in you that will make you say to yourself:

“Wow, what a financially successful guy! Without any hesitation, he quit his full-time job to enter into this opportunity 5 years ago, and now he’s got to reap the benefits! He’s an expert seller who honed his skills for years and hey, he wants a driven person like me to be successful too. How could this be so wrong? He just wants me to buy a P10,000 state of the art stem cell lotion, and with some 3 months of work, I will get at least P20,000 back from my buyers!”

You may say, nah, this is not me, this poor victim is just too gullible to be me. Above can be an extreme example, but if you will somehow experience this kind of “greedy excitement”, don’t hesitate to step back and buy some time.

It is also noteworthy to seek opinion from a financially savvy friend, better yet get advice from your lawyer or accountant. When in doubt, especially when investing huge amount of money, don’t hesitate to contact our Securities and Exchange Commission (SEC).


Investment return greatly exceeds the expected returns

Next thing to ask yourself is the mathematics of the opportunity. Any business venture should be viable – which means it can deliver the return within the promised time, continuously. Successful scams that pillaged billions always appear to deliver returns as promised, thereby increasing the investor base abruptly. The sudden rise of popularity can somehow legitimize the scam. After some time, this house of cards starts to crumble miserably while the chief villain departs from the scene of crime with the bulk of money.

No matter how successful an organization is, always look their return profile; if it is significantly higher than the expected returns, it is mostly likely fraudulent. So, what are typical investment returns?

  • Start-up companies –  return of 20% per year is quite possible (double your money in 3.8 years)
  • Stable companies – return of 9% per year is quite probable (double your money in 8 years)
  • Investment in bonds – return of 5% per year is quite certain (double your money in 14 years)

Observe how “possible”, “probable” and “certain” are used. This is the finance principle of “high risk, high return” or “low risk, low return”. If the investment opportunity is double your money in a month or even a year, that is probably a scam or illegal!

But you may ask: “how can this be an empty promise? The bank statement of my friend clearly shows a lot of money coming in every month for the last six months!” Well, expect compelling proof (documents, testimonials, etc.) from scammers convincing you that these returns are legitimate – more than 99.9% of the time, they are not. These false returns may just be results of a Ponzi Scheme (the Ponzi scheme generates returns for early investors by acquiring new investors).

GUARANTEED RETURNS DO NOT EXIST that even a government which prints money and collects taxes can still fail with its obligations. Close to risk free investment is a stable and prosperous government issuing short term securities with expected return of around 3% per year or less (that’s double your money in 24 years!).


There are a lot of fantastic recommendations about the opportunity

If people are displeased with their financial condition, they tend to expect an end to the “losing streak” of life. They are most vulnerable to these “heaven-sent” messages of prosperity and hope. Same with “tomorrow will be too late” sign above, these alluring bandwagons are just facades to make the victim sunk in the money while the opportunity is fresh without even reading the fine prints of the investment. A real investment opportunity discusses both the risks and rewards. If you don’t fully understand the risk of the investment, don’t invest.

Also, Philippines as a religious country is very vulnerable to faith-based scams. Just remember to distinguish the P500 Sunday offering from P50,000 investment that offers heaven shattering returns. Avoid experiencing the going through hell and back scenario by taking some time and seeking advice, preferably from an unbiased source.

Product being offered is overpriced

Always avoid ventures that give emphasis on recruitment of members or “down-lines”. The recruitment is usually paired with selling an overpriced product. When temporarily sustained, the recruitment creates a pyramidal structure that delivers huge returns on top bosses with the down-lines struggling to convince (or deceive) their new down-lines to buy the overpriced product even if there is no real need for it. Keep in mind that a sustainable business model for a product includes a real demand and a justifiable price point without using excessive “overselling” in the process.

Almost all breakthrough products are produced by businesses that spent a lot in research and development (e.g., pharmaceutical industry). These companies probably don’t need retail investment (from average person) since they themselves are usually supported by huge corporations or funds. The expensive health and beauty products developed by these companies are usually sold to identified channels (like pharmacies, clinics or hospitals), that in turn sell to an average person (retail).

Good investment opportunities are usually built on years of relationship with relevant people or familiarity of the company and product.

Participating in seminars and trade fairs are good avenues to build legitimate relationships and product familiarity. Keeping yourself updated with the business environment by reading news and books can also bring a better investor in you.

Lastly, keep yourself refreshed by reading the SEC’s guidelines (the do’s and don’ts for investors) to avoid becoming a scam victim:

  1. Be wary of unexpected telephone calls, letters, or even personal visits from people who offer quick profit schemes that require your immediate investment.
  2. Be suspicious of “inside information,” hot tips, and rumors that supposedly will give you a big advantage over other, less knowledgeable investors.
  3. Turn down money request accompanied by high-pressure warnings like “Tomorrow will be too late”, “Positioning is important” or “Act now because there will soon be long waiting lists of others who want to take advantage of this golden opportunity.”
  4. Be wary of schemes that give emphasis on recruitment of members or “down-lines”, particularly if the product being offered is overpriced, as the same may be a disguised pyramiding scheme.
  5. Do not engage in foreign currency trading unless you fully understand the mechanics or dangers of currency trading and can afford to lose your money (margin or security deposit). There is no such thing as a guaranteed return in currency trading.
  6. Ask for a prospectus, offering circular, financial statement, or other similar document before you even consider investing. Then read the small print carefully, particularly on refund, and make sure you understand the terms thoroughly before signing any kind of commitment.
  7. When in doubt, make no promises or commitment, no matter how tentative. Remember, “if it sounds too good to be true, it usually is.” It is far better to wait and lose an opportunity than to take the plunge and lose everything.
  8. Before making a commitment, get an opinion from your lawyer, stockbroker, accountant, or the appropriate government office.
  9. Always demand official receipts in the name of the corporations or entities you are dealing with.
  10. Note that a Primary SEC Registration only grants juridical personality. It does not automatically give a company the authority to engage in all types of business activities such as lending, selling of securities and investment contracts, investment taking, etc. To confirm that the company or individual is properly licensed to conduct the business in question and has no history of violating the law, get in touch with the SEC.

DISCLAIMER: The author or Whenwire assumes no responsibility or liability for any errors or omissions in the content of this article. The information contained in this article is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness or timeliness. The information contained herein is not intended to be a source of investment advice or credit analysis. If you have any doubts as to the merits of any transaction you are considering, you should seek advice from an independent financial advisor or consultant.

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