4 Types of Investment Fraud

Thousands of Americans are affected by financial crimes each year. Investment fraud is one of the most common financial crimes and can take many forms.

Because the nature of investing is very complex, it is possible for someone to be accused of investment fraud even if they did nothing wrong. For example, an investor who loses money may claim that their money manager committed illegal actions when, in reality, the investment simply didn’t pay out any dividends.

4 Types of Investment Fraud

Although investment fraud schemes all share the same goal, the details of a scheme can play out in many different ways. By constructing schemes with multiple layers of complexity, fraudsters can conceal their intentions and increase their chances of success. Some common types of investment fraud include:

  • 1) Pyramid Schemes – The pyramid scheme is one of the most widely used fraud types. Fraudsters ask potential targets to invest money and then recruit others to send in an investment. By promising high returns and recruiting new investors, the fraud operators collect money and then disappear before the scheme collapses.
  • 2) Advance Fee Fraud – This ploy asks investors to send a small “fee” in order to release a large dividend. In reality, the dividend does not exist and no money is ever sent to the investor. By duping multiple investors, the perpetrators can rack up huge sums.
  • 3) Affinity Fraud – This investment scheme presents the perpetrators as members of the target’s social, ethnic or age group. By pretending to collect money for a cause that the target identifies with, the perpetrators lull the victims into a false sense of security.
  • 4) Ponzi Scheme – One of the most infamous investment frauds, the Ponzi scheme dates back to the 1920s. In this scheme, a false investment opportunity is presented to investors. As investments flow in, the fraud operators use the investments to pay “dividends” to the initial investors. This creates the illusion of a sound investment. Eventually, the scam perpetrators disappear with the investments of their victims.

Penalties for Investment Fraud

Investment crimes are usually prosecuted as securities fraud by the Securities and Exchange Commission. These crimes are usually charged as felonies because securities markets are regulated by the federal government. Some penalties include:

  • Fines from $10,000 up to $5 million
  • A 5-year term of confinement in federal prison
  • Mandatory restitution of all money lost by investors

Money Fraud Criminal Defense

It is possible to defend against charges of investment fraud. For example, a person who was operating a legitimate investment opportunity that didn’t pay off may face accusations from angry investors. The defense attorney could argue that the investor was acting in the best interests of the investors and is not liable for the losses in an unpredictable market.

Share this Article

About the Author

Law Office of James Alston. serves people who need legal assistance in their Criminal Defense Cases in Texas.

Houston Criminal Lawyer James Alston represents clients in the Houston area, including Pasadena, Sugar Land, Missouri City, Channelview, Conroe, Galveston, Angleton, Richmond, Rosenberg, Beaumont, Galveston County, Ft. Bend County, Montgomery County, Brazoria County, Harris County and Jefferson County in Texas.