The Top 10 Investment Scams in Canada and the USA

October 23, 2019

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Investment scams in Canada and the United States generally involve you putting up money for either a questionable investment or one that does not even exist. From guaranteed high returns and low risks to hot tips and insider information, the pressure to buy into these schemes can be overwhelming. Often enough they come from shady non-registered sellers with giveaway signs of a scam. Still, often enough, they don't. In this article, I will touch base on the top 10 investment scams in Canada and the United States.

The Canadian Financial and Consumer Services Commission outlines a wiki worth of investment scams. These scams range in nature but can generally be broken down into five categories: online, through the phone, in the mail, at your door, and the pernicious "other." They range from SPAM emails to Canada Revenue Agency impersonators, all the way into binary options.


"Not all of the top 10 investment scams in Canada and the USA are outright scams."
What makes these scams all the more shocking is that not all of the top 10 investment scams in Canada and the USA are outright scams. As many as one-third of the scams, I saw involved otherwise legitimate investment vehicles being used to defraud people. The time-tested recipe is to talk all about the rewards and maintain a strong information asymmetry between the buyer and seller of the supposed investment. As someone with a background in precious metals, my skepticism begins with conventional accounting standards that I might be overheard calling a scam in their own way. But I'm here to talk about the really bad stuff. Here are my picks for the top 10 investment scams in Canada and the United States that should keep you up at night.
1. Ponzi/Pyramid Schemes

The first sort of 'investment scam' to be aware of is the Ponzi scheme. Named after Charles Ponzi, who carried out such a fraud first in 1919, is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to first investors from money invested by later investors. A Ponzi scheme is able to maintain the illusion of a sustainable business as long as most of the investors do not demand full repayment and are willing to believe in the non-existent assets, while new investors are found who are willing to contribute new funds. The concept of the Ponzi scheme did not conclude in 1920. As technology advances, so did the Ponzi scheme. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified trading reports to show a client was earning a profit.

The first Ponzi scheme was orchestrated by Charles Ponzi himself in 1919

The post office at the time had developed international reply coupons of which allowed a sender to pre-purchase postage and include it in their correspondence. The receiver would take the coupon to a local post office and exchange it for the priority airmail postage stamps needed to send a reply. With consistent changes in postage prices, stamps were more expensive in different countries. Ponzi hired agents to purchase cheap international reply coupons in various countries and send them to him. He then would exchange the coupons for stamps that were more expensive and then sold them for profit.

Regardless of the technology and its advancement, Ponzi schemes all share mostly the same characteristics such as:
  1. A guaranteed promise of high returns with little risk.
  2. A consistent flow of returns regardless of market conditions.
  3. Investments that have not been registered and investment strategies that are a secret or described as too complex.
  4. Making sure clients are not allowed to view official paperwork for their investment.
  5. Clients face difficulties removing their money.

Ponzi schemes eventually do not have enough money to go around and the schemes therefore unravel. By then, the promoters are long gone with all the money.


2. Pension Scams

Contrary to what it may seem like, pensions cams are not targeted at pensioners. Well, not exactly. A pension scam targets people who have their retirement savings locked in a retirement account. These people are future pensioners. And with such accounts, we cannot normally withdraw money until a certain age is reached. In other words, most of us have certain limits on the number of funds that can be withdrawn and under what circumstances.

 Often, scams are posted as "RRSP loans."

The general idea is that the person or company giving you the lean lets you get around tax laws and tap into your locked-in retirement funds. As the UK's Pension Wiseexplains, the crux of the scam is that to receive the money, you have to sell your investments in the retirement account and buy shares in something the promoter [read: scammer] is selling. One dangerous alternative is where the promoter invests on your behalf with the same outcome. In return, the promoter promises a high return but may exceed even your highest risk-tolerances.

With these scams, the stock you are buying is usually going to be worth much less than what you paid. What is not returned to you or recovered is kept, and therefore you can quickly lose your retirement savings.


3. The "Pump and Dump" Scam Never Gets Old

Since before the modern stock market existed, the idea of hyping something up and selling it was around. In fact, the pump and dump scam can be found in several historic market crashes and manias. Few as clear as the south-sea bubble, where peddlers were selling stock on the streets to anyone who would buy it.

The idea with the pump and dump scam is to work through lists of potential investors to promote an incredible deal on the low-priced stock. While some investors may get sold on the stock, others are hoping for a bigger fool will come and take it from them. What they don't know is that the person or company contacting you also owns a large amount of that same stock. In fact, the scam is really at its finest when the stock may not even represent a business that does anything.

You are buying a shell company with no likely no assets.

As more and more investors buy shares, the value of the stock rises sharply. Once the price hits a peak of the scammer's choosing, the scammer sells their shares and the value of the stock plummets. You are thereby left holding worthless stocks.

One case-and-point comes from the famous Enron story. Going as far as Q1 of 2001, senior management was involved in a pump-and-dump beyond the bad accounting. While some commentators appear to have seen this, most people on Wall Street were fooled despite executives selling stoc. By the time the company became insolvent, numerous executives got out at a high that cost investors over a billion dollars.


4. Advance Fee Scheme

An advance fee scheme contains a victim being persuaded to pay money upfront in order to take advantage of an offer promising significantly more in return. The catch is very simple and straightforward. The scammer takes the money and the victim, of course, never hears from them.

Scammers typically target those who have lost money in the past. They will contact these investors with an offer to help them recover their losses from their previous investment. This sort of trick is similar to a loan, where you never really know if your investment money or borrowed funds will ever be returned. Even if you receive monthly or annual reports, you cannot be sure that the reports are not fake.

Promissory notes are also something to keep in mind. A promissory note is a legal instrument in which one party promises in writing to pay a determinate sum of money to the other, either fixed or determinable future time or on demand of the payee, under specific terms. It is not to say that all investment opportunities that require a fee in advance are a scam per say, but you must be careful when providing money upfront.


5. Offshore Investments not only make the top 10 investment scams in Canada but are near the bottom in terms of the chances of recovering your money.

"Send your money offshore;" "send your money to another country for higher returns..." and all other calls to put your money in a different country, to make money fast, are a bad idea.

In fact, such phrases are and need to remain immediate red flags. Typically, high net worth individuals and businesses may send funds offshore to avoid and lower taxes. Even in these cases, you need to be very careful as tax evasion is a serious crime. Moreover, this scam is much more likely to be an investment scam than a savings scam.

Be skeptical of hyped-up tax avoidance schemes.

They often result in owing the government money, interest and penalties. Building on that, there are risks that come with moving money internationally. It can be a great move when you know what you're doing, or an absolute nightmare for the inexperienced. Let's say you send the money and something just happens to go wrong. You might not even be able to recover the money with your own jurisdiction.

With all that in mind, if someone asks you to outright wire funds to another country (especially outside of Canada, Europe, and the USA) as part of some scheme they will pay you for, there is an overwhelming chance that your money will cease to exist. Well, at least for you it will...


6. Exempt Securities Scam

When a corporation is looking to sell it securities in Canada, a prospectus must be filed with securities regulators. Exempt securities happen to be excluded. They may be sold without a prospectus, but they are limited to accredited investors or certain other conditions.

On their own, exempt securities aren't scams. But some scammers pitch fraudulent investments as "exempt" securities. Be suspicious if you get an unsolicited phone call about a hot tip on promising business that is about to "go public".

You may be told that the investment is only available to very wealthy people, but an exception will be made for you. You could be asked to sign some paperwork that misrepresent your income or net worth. If you have to lie about how much money you have, you are dealing with someone who breaks the rules.


7. Currency Scam

The foreign exchange market is considered to be the largest and most liquid financial market. Investors buy and sell currencies with a common goal of making money on changes on the rates.

This can be very risky. Foreign exchange ads promote easy access to the market. However, the market is dominated by well-resources international banks with highly knowledgeable staff, advanced technology and large trading accounts. It is difficult to beat these professionals.

Some foreign exchange trading can be illegal. Similar to offshore investments, you must be careful that unregulated firms are not trading funds fraudulently. Because foreign exchange trading services are often operated online from various countries, unregulated firms may be marketing their services outside the rules. In all of these situations, you are likely to lose some or all of your money.


8. Boiler Room Scam

The term boiler room actually refers to an outbound call center selling questionable investments by phone. Boiler rooms cold call potential investors and then pressure them to buy shares. Boiler room operators usually set up in a different country than the people they target. This is done to avoid detection by securities regulators and enforcement agencies.

The scheme usually starts with an unsolicited phone call. Once the caller has you on the phone, then they try to persuade you to invest into the company that they are promoting. Promotors will then advise you to wire money into an account, while they promise to send you stock certificates. In the end, shop is closed or doesn't even exist and you will most likely never see your money again.


9. Real Estate Schemes in the Top 10 Investment Scams in Canada

Common real estate schemes are short-term loans to buyers, construction loans to companies, and even shares in an income property. In the latter case, a building that will earn income and pay it out to investors is fraudulently sold or fraudulently made to look financially attractive with fake or worthless leases. Scam artists offer high guaranteed rates of return to investors seeking steady income from a tangible asset like real estate.

While most buy real estate as a personal investment, sometimes real estate is sold as a security. These situations involve a sale where the purchaser does not own or live on the property, but may earn a return through the efforts of another party in connection with the property.

Illegitimate schemes are often promoted through aggressive advertising with promises of big profits for investors in only a few years. Investors contribute to a pool of funds that is used, to buy and hold property. Often, investors are charged high fees and offered little in terms of details. In illegitimate schemes, the property value is sometimes inflated to attract investors; other times there is no property at all. As with many other schemes and scams, communication dwindles or ceases all together once you invest.


10. Promissory Note Scheme

Many companies use legitimate promissory notes to raise money. Legitimate promissory notes are commonly used by businesses. These transactions usually involves sophisticated investors capable of doing thorough research on the person or business they are investing in.

Bogus promissory notes—such as those depicted by Scam Warners— tend to guarantee above-average, fixed interest rates. They may also guarantee the principal-something legitimate notes do not do, as there is always the risk a company cannot meet its obligations.

Want to avoid this piece of the top 10 investment scams in Canada? Look out for:
  1. A start-up company with little or no business history offers its "high-quality" notes to retail investors.
  2. Or an investment promises returns above the market average for a similar type of investment.
  3. The notes are promoted as being a short-term, high-interest investment.
  4. Someone who is not registered with a securities regulator is selling or promoting the notes.

Don't Get Rich Quick

Reading through this list, there is one thing you may have picked up about the top 10 investment scams in Canada. That is, they usually exhibit a healthy measure of "Get Rich Quick." This is usually the first red flag, i.e. warning sign when it comes to financial fraud. Arguably, it is the first red flag towards any bad investment. So to sum it up, be skeptical. Common sense is all too uncommon in these situations because as Robert Cialdini explains, con men stripped of all the fancy tools are just people very good at influencing others through communication.

More often than not, when someone really has a great idea or way to make money, they are going to keep it to themselves and pursue institutional financing. I will leave institutional scams to another article, however.

A final note is to be careful of some investment seminars. It is, unfortunately, getting easier and easier to defraud humanity with advancement in technology. Tangible investments like gold bullion, for instance, are one historically less risky option for of peace of mind.

Now that you are somewhat familiar with the top 10 kinds of investment scams in Canada and those surfacing in the US, watch out for new ones. There is no substitute for common sense. It will keep you will be prepared for whatever fraudsters might throw at you.



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