The Most Common Investment Fraud Tactics – Part Two

One of the best ways an investor can protect the value of their investments is by equipping themselves with knowledge about common tactics scammers use to defraud investors. The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have identified five of the most common techniques used in committing investment fraud. [1]

More information on the first three of these tactics – the “phantom riches” tactic, the “social consensus” tactic, and the “credibility” tactic – and how investors can avoid them can be found in Part One of this two-part series.

Here, we will consider the remaining two most common investment fraud tactics identified by FINRA and the SEC: the “reciprocity” tactic and the “scarcity” tactic.

The Reciprocity Tactic

Under the reciprocity tactic, supposed investment professionals will lead investors to believe that if the investor participates in the investment opportunity at hand, they will receive an outsized benefit relative to what they put in, while the investment professional purports to take some sort of a hit. [1]

In the real world this tactic can look like a fraudster offering an investor half off on a given investment opportunity, along with a break on usual commission, so long as the investor buys in immediately. [1]

Like many common investment fraud tactics, the reciprocity tactic is yet another example of an investment opportunity that appears too good to be true. The supposed investment professional or stockbroker puts pressure on the investor by offering what looks to be a great deal in exchange for the investor’s immediate buy-in, depriving the investor the critical chance to investigate and confirm the credibility of either the professional or the investment opportunity.

The best way to avoid falling prey to such a scheme is for investors to understand that authentic investment opportunities will not be sold using coercive tactics such as this one. Investors should never make an investment decision before taking the opportunity to fully vet the professional offering the opportunity and the opportunity itself.

The Scarcity Tactic

Similarly, the scarcity tactic also unduly coerces investors into taking immediate action with their dollars so as to “take advantage” of a seemingly can’t-miss investment opportunity. In reality, when this tactic is offered, investors should only expect to lose money, not gain.

When fraudsters employ this tactic, they convince prospective investors that if they do not buy into the investment opportunity immediately or very soon, the remaining units will be taken up by other, competing, investors. [1]

Investors should be on the lookout for communications implying that there are only a small, finite, number of units left to invest in, and that these units are going fast. [1] Any implication that the investment is scarce should alert investors to exercise heightened due diligence in determining whether the investment opportunity is legitimate.

Unfortunately, tactics employed by investment fraudsters continue to improve and shift over time. Luckily, investors can be their own first line of defense. With the help of online resources to validate the licensing status of investment professionals and investment opportunities, along with an understanding of the most common tactics and red flags to be aware of, investors can avoid falling prey to investment fraud.



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