Recognizing a Scam
If you are approached with an investment opportunity, it's important to look carefully at what exactly the opportunity is offering and who is offering it. Investing in an unsuitable investment can have social and financial impact on you and your family.
Know the risks and rewards of various investment opportunities to better prepare yourself for the next time you are approached to invest your money. Here are some items to consider:
Affinity/ Group fraud
Scam artists take advantage of the common bonds people develop through religious, professional or ethnic affiliations to gain a victim's trust. Typically, fraudsters target a respected member of an affinity group and, through that person, attempt to meet and gain the trust of other group members to convince them to invest in their schemes. Requests for secrecy are an immediate red flag that something might be wrong.
While it is always good to get a second opinion from others when considering investments, consider consulting with a third party with business knowledge. While family, friends or colleagues can be great sounding boards, they may not have checked into the investment, the promoter or the company themselves. Don’t assume that they have done a background check and do your own research.
Usually involve a pyramid (or ponzi) scheme where part of the money from new investors is used to make payments to earlier investors (see description below). Some currency trading scams target potential customers in ethnic or immigrant communities, often through advertisements in ethnic newspapers and television infomercials. Many such advertisements offer so-called "job opportunities" for account executives to trade foreign currencies. No promising job opportunity will ever ask you to put up your own money as a condition of employment. What appears to be a promising job opportunity is actually another way for these companies to lure people into parting with their money.
Churning occurs when a securities professional makes unnecessary and/or excessive trades in order to generate commissions. Most churning occurs when an investor grants his or her broker discretion to trade the account on his or her behalf.
Commodity Futures are exchange traded, legal contracts that are regulated, in Alberta by the ASC. Trading in commodities is a high risk activity mostly done by hedgers and speculators. Commodity contracts are not suitable for the unsophisticated investor.
There are foreign commodity firms advertising and soliciting investments from Albertans - usually through 1-800 numbers presented in television and radio advertisements. These firms will often offer courses on how to trade in the commodity markets.
In order to conduct business in Alberta, commodity brokers must be registered with the ASC.
Exempt market activity
Recently attended an investment seminar or heard about an investment opportunity from someone who has actively solicited your interest?
Recent changes to securities laws help ensure that only qualified persons can deal or advise with regards to securities (proficiency), that registered persons must be honest and of good repute (integrity) and that registered persons must be financially viable (solvency).
Subject to relying on an available exemption, as of September 28, 2010 anyone in the business of trading securities must have applied for registration with a local securities commission in order to sell investments.Individuals who are in the business of trading “prospectus-exempt” securities (meaning they are not required to be sold under a prospectus) are called “Exempt Market Dealers” or “EMDs”. All EMDs must be registered with their local securities regulator – in Alberta, this is the Alberta Securities Commission (ASC).
Foreign currency trading (FOREX)
You may be solicited to purchase software or sign up for trading courses to learn to invest in the foreign currency exchange market, known as FOREX or FX Trading. Be aware of potential hidden costs and the high degree of risk related to seminars or computer programs promoting this. While newspaper, radio, television and online ads claim you can learn to trade quickly and easily on the foreign exchange market, the fine-print disclaimer invariably states otherwise.
Foreign exchange contracts are extremely risky ventures. Free demonstrations of the software are often accompanied by high-pressure sales tactics - the software packages that cost thousands of dollars.
What the ads may promise:
- You won’t find an easier, more tested and flexible way to put dollars in your portfolio.
- You can make profits with as little as $300.
- You trade without commissions and trading is available 24 hours a day, six days a week.
- The FOREX market is the largest financial market in the world and provides more opportunities than you’d ever get in the stock market.
- The seminars will prove how easy it is to make money from currency trading.
What they don’t tell you:
- The software being promoted looks at past performance to identify trends in currency trading. It uses these trends to predict the currency’s value in the future. As helpful as the software seems, it cannot accurately predict market fluctuations, nor can profits be guaranteed
- While there may be no commissions, the promoters make money from the sale of the software and on the “spread” between the buy and sell quotes made on each purchase and sale.
- Individuals who attend free demonstrations may experience high-pressure sales tactics and be asked to purchase software programs for thousands of dollars.
The Fine Print
- Currency futures markets are volatile and contain substantial risks for inexperienced investors. They are not the place to put any funds that you cannot afford to lose.
- Software is a tool that tracks past performance. It does not replace research or licensed investment advice.
- Past performance does not ensure future results.
- No system that analyzes trends in foreign currency is free of risk. The system cannot factor all the variables capable of influencing market fluctuations.
Should you decide that FOREX trading is suitable for you, ensure you have the appropriate financial and business experience and keep the following in mind:
Avoid margin trading (leveraging) unless you understand its consequences. Many currency traders ask customers to give them money known as "margin," often sums in the range of $1,000 to $5,000. These amounts, which are relatively small in the currency markets, actually control far larger dollar amounts of trading. You need to be aware that margin trading can make you responsible for dollar losses that are far greater than the margin amount you deposited. Don’t trade on margin unless you fully understand what you are doing and are prepared to accept losses that exceed the margin amounts you paid.
Be suspicious of “intrabank/interbank markets”. Fraudulent firms will often tell customers that their funds will be traded in the “intrabank market.” This market is normally reserved for banks, investment banks and large corporations. Your losses can be very large in a single day. Companies that tell you otherwise may well be engaged in illegal activities.
Get the company’s track record. Just because they appear or claim to have made a lot of money investing in foreign currency doesn’t mean it’s true.
Only accredited investors are eligible to invest in FOREX.
If you’ve been invited to invest in the latest “green” technology, be aware that some opportunities may not be what they seem. Like any industry, there are companies that play by the rules and others that don’t. Some companies take advantage of your green generosity by inviting you to play an active role in helping to save our environment – and who wouldn’t want to do that?
While the ASC is not here to comment on the viability of new technology, we can let you know if the company or individual selling you an investment is doing so in agreement with Alberta securities laws.
Here are some warning signs that could indicate a “green” investment scam:
- Cliché lines: You may be told that this technology has a “massive following”, that it is the “wave of the future” and that you can “be part of this revolution that will save the world”.
- Detailed drawings and technical jargon: Some companies post detailed drawings, pictures and descriptions of the technology you’ll be investing in on their website. In some cases, this information is intended to confuse and intimidate you in hopes that you won’t ask any further questions about the investment.
- Offshore contact information: If you are asked to send your money to an offshore account, beware. You may have a difficult time getting it back if the investment goes sour.
- Big promises: If you are told that the company will soon be “going public”, that they will be “trading on the exchange” or that the investment is “no risk” or “guaranteed”, this could be what is called “prohibited representation” and is a big red flag.
- High percentage of commission: Ask the company for a copy of documents outlining details on the investment, such as an Offering Memorandum, before you hand over your money. These documents should include information on what the individuals selling the investment are taking for their commission. You might be surprised at what you read.
Generally consist of a group of people who share a common interest of investing - they may or may not be interested in pooling their resources together. Participating in a group such as an investment club can give you a feeling of camaraderie, but can also lead to a false sense of security. People often believe that others have done their homework regarding an investment and therefore they can trust their judgement and don’t feel they have to also do their own research. Also, in a close-knit group, some investors might be less willing to ask questions as they don’t want to appear uninformed in front of their peers.
There might be others in your investment club who have different financial goals than you or might be comfortable with a higher level of risk than you. Some promoters will tell you that you need to be a member of their club before you can invest in their product. Be wary of this type of condition, there may be hidden fees that you aren’t aware of.
Misleading sales tactics and practices
Bait and switch schemes – Investors should be wary of investments that are advertised as having unusually high returns, especially if a personal visit is required. During the face-to-face meeting, the salesperson will discourage the investor from investing in the advertised product, switching them to a different investment altogether.
Boiler Rooms – Find out more
Cold Calling – Find out more
Misleading credentials – Some salespeople or financial advisers create the impression that they have special education or expertise in senior/retirement services. If credentials contain words such as “senior” or “retirement” in conjunction with the words “certified” or “registered”, be cautious. These credentials may be no more than a commercial gimmick. Their specialty may be more about knowing how to “sell” to seniors, and less about what may actually be in their clients’ best interests.
Ponzi/ Pyramid schemes
Ponzi scheme - promises high rates of return with little or no risk to investors. Unknown to investors, returns are paid from their own money or money paid by new investors rather than from profit. There is no legitimate investment. Will usually pay promised returns to early investors, as long as new investing occurs. Existing investors are often promised extraordinary returns and commissions for bringing in new investors. Usually collapse on themselves as new investments stop and investors lose some or all of their money.
Pyramid scheme - participants actively promote the scheme and try to make money solely by recruiting new participants into the program. Participants move up the “pyramid” as new investors buy in. However, when new participants cease to exist, the scheme collapses. Often advertised as Gifting or Networking Clubs. Promoters refer to “Gifting” and claim that it is legal. If participants enter into a scheme with the expectation of profit - this not a gift exchange. A gift is something that does not involve the receipt of a benefit. Typically, the majority of those who invest in pyramid schemes lose their investment and can become the subject of investigations by the police and Canada Revenue Agency.Pyramid and Ponzi schemes are often spread by word of mouth through groups such as religious institutions, ethnic groups, or professional affiliations, frequently in an atmosphere of secrecy.
Prime bank instruments and religious affiliations
Beware of possible illegal investment schemes promoted through affiliations with religious and community groups. This is sometimes referred to as a Prime Bank Instrument.Investors may be asked to contribute funds to markets available only to the largest banks and wealthiest families. Words such as Prime Bank notes, Treasury Bills, Certificates of Deposits, Letters of Credit, or Bills of Exchange are used to add legitimacy to the scheme. You may also receive impressive documents, such as offering memoranda, disclosure statements or promissory notes. Although these documents may look real, they can be easily forged using computer software.
Prime Bank Instrument fraud could include any of the following:
- A promise of no-risk and high rates of returns
- A request for secrecy
- Sending money out of country
- A quick turn-around on returns
In some cases, friends or family may promote an illegal investment opportunity because of a possible finder’s fee incentive.
Pump and dump
Fraudsters heavily promote or “pump” the purchase of specific company stock, which creates high demand and drives up the prices of the stock. Individuals behind the promotion then sell or “dump” their shares at the increased price and stop promoting the stock, which leaves other investors with stock that is worth far less than what they initially paid for the stock.
Unscrupulous promoters or brokers will often hype a stock through use of company websites, online bulletin boards, chat rooms and online investment newsletters. They may even create false press releases or mislead investors with claims of a revolutionary product approved by a federal government agency. After the price skyrockets, the promoter or broker sells the stock to an unsuspecting investor and pockets the large profit.
Read more about Investment Fraud on the Internet.
Real estate investment opportunities
Be sure to understand your real estate investment opportunity. For example, is the offering a security?
Generally, a sale of a piece of real estate as an investment or for personal occupation is not considered to be a sale of a security under the Securities Act (Alberta).
However, if the sale involves a scheme or arrangement whereby the purchaser may earn a return through the efforts of a third party in connection with the real estate, it may be considered to be a sale of a security.
In other words, if a buyer purchases a piece of real estate for a set price to take ownership on a set date, that is likely a real estate transaction. If the seller retains ownership of the property and a buyer purchases an interest in the property or its owner, expects a return on his or her investment and neither plays a role in the management of it nor occupies the property as tenant, then the transaction may be the sale of a security.
If a sale of security occurs it will be subject to the requirements of the Securities Act (Alberta), and as such must be conducted by or through a registrant, under a prospectus, or by way of an exemption from the prospectus requirements. To see if a company is relying on an exemption, click here. Possible warning signs:
- Paid real estate advertorials (advertisements designed to look like regular news articles)
- Offers of loans or suggestions of ways to finance the investment (e.g., remortgaging your house) and further investment seminars.
- Promises to ‘be a millionaire in three years’, ‘get rich quick’ or ‘have the retirement you have always dreamed of’.
- High membership fees with vague explanation of forms you must sign.
- Talk of tax avoidance, moving money offshore or using RRSP eligibility as a hook.
Scam marketing/ advertising
Some people who use paid advertisements to promote their investment opportunities may not be properly registered to trade in securities. As well, certain ads may provide misleading information to the public regarding potential investments.
You might be introduced to the investment opportunity via:
- professional looking websites, emails, advertisements, flyers and/or invitation in the mail
- radio ads or trade show sales pitches that appeal to your lifestyle goals
- invitations to seminars with free perks such as a free dinner or travel
- ads in newspapers, magazines, television, newsletters, online or on billboards
- word of mouth appeals through friends, family or co-workers that are interested, have already invested in the company or may have something to gain in recruiting you
In many cases, investments described in the advertisements may look or sound legitimate, but unless investors verify this first with an objective source such as their provincial or territorial securities regulator, they could risk committing their money to a misleading or illegitimate opportunity. In this situation, once money changes hands, it’s often difficult or impossible for investors to get their money back.
Investors shouldn’t assume an opportunity is legitimate based on where it appears or how it is presented.
Find out more by reading our Prevention Checklist on Investment Ads (PDF)
Investment companies may invite potential investors to a “seminar” through an ad in a newspaper or magazine, a phone call, a booth, or simply word of mouth from family, friends or co-workers. If a friend has invited you, don’t assume that s/he has done any background checks – they likely haven’t.
The seminar may include a motivational speaker, an investment expert or even a self-made millionaire who may give advice on investing and explain how investors can get involved. They may suggest following high-risk investment strategies, such as borrowing huge sums of money to buy into the investment or promoting investments that involve lending or borrowing money on unsuitable terms.
Some “Red Flags” to watch for:
- Above average returns with little or no risk. No investment is risk free.
- Offer of loans to cover both the investment and further investment seminars.
- Claims of a secret or exclusive technique for building wealth. The salespeople at seminars can make misleading claims that entice you to sign up right away.
- Limited time offer that discourages investors from getting independent advice.
- Promises to ‘be a millionaire in three years’ and ‘get-rich-quick’.
- Sales pitches of no cost involved or free attendance at seminars. The first session you are invited to attend may be free, but you may have to pay fees and commissions that the promoters did not tell you about beforehand.
There are some important questions to ask before signing up for or attending an investment course or seminar:
- Who is offering the course/ seminar? – is the company or individual qualified to teach the course and are they in good standing with securities regulators?
- How much are they charging for the course? There are many free or inexpensive sources of information available to investors. Does the fee to attend seem reasonable? Some of these companies make their money by charging seminar attendance fees, selling highly-priced reports or books and selling property and investments through high pressure sales tactics.
- What does the person offering the course have to gain from you being there? Are they looking to gain more clients and ultimately sell you their product? Look for reputable, unbiased sources when choosing investment courses. Courses and information offered through libraries, universities or colleges or through a government regulator such as the ASC tend to be more objective with good, unbiased information.
can be quite charged and exciting. You should only make investment decisions after you have taken some time to think about them, conducted your own independent research and most importantly, sought advice from an independent financial adviser.
A note about free meal seminars: You may receive an invitation to attend and event where you will receive a free meal and hear about investment opportunities. While free meal seminars may be a legitimate method through which to obtain new clients, some seminar salespeople may try to sell you unsuitable investments or convince you to replace your existing investments. Others may use these seminars simply to obtain your personal and financial information.
Brokers/financial advisers – Would you trust your physical health to an unlicensed physician? Then, why trust your financial well-being to an unregistered securities “professional”? Dealers and advisers are required to be registered with local and federal regulators.
Investment products – Some investment products must be registered with the provincial regulator where they are offered and sold. Always check with your adviser or regulator to make sure your investment funds are being placed in a legitimate investment product.
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