6 Common Types of Investment Fraud and How to Identify Them 

Foreign exchange

Similar to the crypto scams noted above, these involve scammers promising easy gains for investments in foreign exchange markets. They often keep the ruse going by delivering payouts Ponzi scheme–style.

Recent case: In late 2022, the Securities and Exchange Commission alleged that Houston resident John Fernandez had fraudulently raised more than $4.3 million from about 175 investors, promising “guaranteed interest every month” from trading in currency markets. Rather than investing in foreign exchange markets, he sent investors computer screenshots of fabricated gains from trades, the SEC said. He paid out some money, but that was mostly a Ponzi scheme — a fraud in which the illusion of a successful operation is created by paying investors fake “profits” that are simply money paid in by other deceived investors. When that venture failed, Fernandez blamed a “tax blowback” and asked investors to move their money to a new investment, described as a “legitimate financial company.” This second venture, which promised annual returns of 5 to 100 percent, failed as well.

Guaranteed buyback

These scams promise the benefits of entrepreneurship with none of its risks. All you need to do is buy something from the scammer, who promises to buy it back from you once it’s ready for market. Variations on this pitch have included “you buy our seedlings, and we’ll buy your plants” and “buy our earthworm farm equipment, and we’ll buy your worms.”

Recent case: Since 2021, a company called Agridime has raised $191 million from more than 2,100 investors in what the SEC says is a Ponzi scheme. The company allegedly agreed to sell investors beef calves for $2,000 apiece, then buy back the same animals at a higher price after a year, guaranteeing a return of at least 15 percent and allowing participants “to become a part of providing fellow Americans with the highest-quality farm-fresh beef available.” Instead, the SEC says, the company acquired far fewer cattle than it sold to investors, had less than $1.5 million in cash as of last September, and made at least $58 million in Ponzi payments to investors. In its advertising, the company acknowledged, “We know it sounds too good to be true.”

Precious metals

In these illegal operations, salespeople persuade victims that they should move their savings out of safe, traditional investments and into gold and silver coins. These coins, the scammers say, will keep your hard-earned money safe when the economy (or the environment or the health system) inevitably collapses. 

Recent case: In a settlement announced last October, the CFTC and regulators from 30 states alleged that precious metals dealer Safeguard Metals had deceived more than 450 investors by selling them $66 million in fraudulently priced silver coins. According to the settlement, the company pushed older Americans, most of whom were inexperienced investors, to empty their retirement accounts for silver purchases by preying on their fears and misrepresenting the safety of traditional retirement accounts. Sales representatives told one investor that the stock market was going to crash and the government would confiscate people’s IRAs and repeatedly called another to say “hurry up” and “make a decision.” Despite telling customers that it typically sold them silver 4 to 23 percent above its own costs, Safeguard’s markups actually averaged 71 percent up until 2021, according to the CFTC.

Commodities trading

This is another example of scammers taking advantage of the fact that most people don’t know much about many forms of investment.

Recent case: Phillip Galles was found by a judge last November to have fraudulently obtained $5.3 million from 65 people for a pool of money to invest in commodities, then to have used that money instead for expenses including luxury car rentals and purchases at a jeweler, Macy’s and Best Buy. Among Galles’ false claims, the judge found: that he had an investment return of 238 percent in 2020; that he managed $1.7 billion in offshore entities and had just raised $3 billion to invest; and that he employed at least five different automated trading models, including “algorithmically determined ‘inflection points’ [that] are filtered using order book dynamics/market microstructure analysis to profit from price movements in either direction around these areas.” When one client asked to withdraw some of his money, Galles put him off with a series of excuses for why he couldn’t, including bank mix-ups that prevented withdrawals and a visit to the emergency room: “A pill opened up in my throat by accident and closed my throat for 2 full minutes. I thought that it was an onion and tried to get it back up. It didn’t go so well.”

Real estate

Whenever you deal with big-ticket items — including real estate — you’re going to find scammers looking for a way in. Sometimes they offer a homeowner quick cash in exchange for a promise to use a certain real estate agent if the owner decides to sell their home, as described in this episode of AARP’s The Perfect Scam. In some cases, homeowners aren’t aware that the contract locks them in for years and that the real estate agent can take out a mortgage on their home. Or, like the case alleged below, a scammer will pitch real estate investments that offer high returns, then take off with the principal.

Recent case: Wilson Baston pleaded guilty to mail fraud and wire fraud in 2008 in a real estate scheme that cost an estimated 185 people more than $22 million. The SEC accused him last June of launching a similar scheme not long after he was released from prison in 2017. This time around, the SEC says, he persuaded people to invest more than $10 million in several real estate deals (which he didn’t identify) by promising to repay their principal, with interest up to 25 percent, within days or weeks. Baston, who allegedly hid his past by using the alias “Chanon Gordon,” touted his ability to flip undervalued properties, but he often used fresh investments to make Ponzi payments to other investors, according to the federal accusations. After Baston failed to repay one investor — he had used that person’s money to pay off someone else — he persuaded the first investor not only to “roll over” the purported principal and interest into a new transaction but also to pay an additional $4,000, the SEC says. Baston fended off requests for repayment by citing obstacles such as moving his office, not having his phone and dealing with multiple bouts of COVID-19, according to the complaint.

How to avoid these scams

Before you invest:

1. Check credentials. Brokercheck.finra.org, adviserinfo.sec.gov and nfa.futures.org/basicnet show finance pros’ records and licenses. “Most scams involve unregistered entities, people and products,” says Melanie Devoe of the CFTC.
2. Look for transparency. Be wary if you can’t independently verify financial statements. One advantage of mutual funds is that you can easily find their price, performance and holdings from multiple sources.
3. Take your time. Don’t rush to invest because you’re told you’ll lose out unless you act soon. “If it’s a legitimate investment, it’s going to be available tomorrow,” says Claire McHenry, president of the North American Securities Administrators Association.
4. Get a reality check. Run a proposed investment past someone who’s not involved with the venture — maybe just a levelheaded friend. That move “can melt away the halo of excitement that comes with a sales pitch,” Devoe says.
5. Know your limitations. Can you afford to lose all or part of your investment? Do you really understand what you’re getting into? If an investment opportunity is confusing or vague, it’s probably not a great strategy for you, McHenry says.