INVESTING: IDENTIFYING THE SCHEMES AND SCAMS

Have you ever come across juicy investment opportunities that sound too good to be true? Ever tried ‘investing’ your money and then lost not because it was a bad investment but because it was never one to start with? Ever thought life is all about risk and reward but in the end, all you can show for it is the risk without the reward. Many have fallen into, at least, one of these categories. In this article, we will be discussing all investment look-alikes and how to spot them a mile away.

PONZI SCHEMES invented by a financial guru/con artist named Charles Ponzi in the year 1919. Ponzi schemes work by robbing Peter to pay Paul. It is usually initiated by the oldest trick in the book, pay some money to get free money. It is characterized by unrealistic return on investment.

Older investors are paid off with the proceeds collected from new participants. The money collected is not put to any commercial use but rather collated to meet the unrealistic returns of the older investors. The promoters, who are unregistered and unlicensed companies, typically promise high returns with little or no risk.  All these are major red flags.

PYRAMID SCHEMES involve making earnings performance-based. This may seem good till you note that the expected performance is reeling in new participants.  For example, Jason gets paid if he successfully gets Kofi to join the scheme. When Kofi gets Lydia to subscribe both Jason and Kofi get paid from Lydia’s investment. Ultimately, the returns on this kind of scheme is solely based on how many people you can bring into the scheme making it similar to ponzi schemes. 

Many people mistake pyramid schemes with multi-level marketing (MLM). MLM, unlike pyramid schemes, have commodities (products/services) that create a value chain. In most cases, where participants of MLM are unable to sell their inventory, the promoters are willing to take back the goods.

COACHING SCHEMES: The trick here is to offer knowledge on how to make money. In most cases, mentoring services are offered which are preceded by false promises of guaranteed income, compelling stories (Grass to Grace themed) and testimonials. The pitfall of these schemes is that the promised knowledge is worthless and designed to make you pay more and more for the classes and resource materials and tools. Typically, a sense of urgency is created to cajole victims.

PUMP AND DUMP (P&D) SCHEMES have been in practice for many years especially in the stock markets. However, the trick scam became one that everyone could spot miles away thanks to spamming. In recent times, pump and dump schemes have got new juice in the crypto currency space. Aided with the widespread acceptance of cryptocurrencies and publicized gains, P&D schemers have continued to rip people off. The hands-off approach by regulators have only made matters worse for investors.

In P&D schemes, the underlying assets in these schemes are fictitious or lack value. The pump is achieved by putting out false information, false promises of future performance and creating a sense of urgency (limited opportunity). The promoters always insist ‘It is not a scam’. A relatable example of this kind of scheme is the ONECOIN where investors lost about $4 billion. We also had the Theranos stock saga which had even several high-profile investors fooled with an estimated total loss of $600 million (The Wall Street Journal, 2018), misleading investors about a false scientific breakthrough with the aim of driving up its stock price. As expected, it all came crashing down in the end.

These are popular schemes used to deceive investors over donkey years however, there will be new ploys and schemes invented we urge you to always carry out due diligence on any investment opportunity before committing your resources to it.

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Thank you for reading and look out for our next article!

REFERENCES

 Carreyrou, J. (2018, May 4). Theranos Cost Business and Government Leaders More Than $600 Million. WSJ. Retrieved January 23, 2022, from https://www.wsj.com/articles/theranos-cost-business-and-government-leaders-more-than-600-million-1525392082

Corporate Finance Institute. (2020, May 4). Ponzi Scheme. Retrieved January 23, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/other/ponzi-scheme/

Hamrick, J., Rouhi, F., Mukherjee, A., Feder, A., Gandal, N., Moore, T., & Vasek, M. (2021). An examination of the cryptocurrency pump-and-dump ecosystem. Information Processing & Management, 58(4), 102506. https://doi.org/10.1016/j.ipm.2021.102506

Magazine, S. (2021, April 15). In Ponzi We Trust. Smithsonian Magazine. Retrieved February 26, 2022, from https://www.smithsonianmag.com/history/in-ponzi-we-trust-64016168/

Multi-Level Marketing Businesses and Pyramid Schemes. (2021, December 2). Consumer Information. Retrieved February 26, 2022, from https://www.consumer.ftc.gov/articles/multi-level-marketing-businesses-and-pyramid-schemes

Napoletano, E. (2022, January 13). Understanding Multi-Level Marketing. Forbes Advisor. Retrieved January 23, 2022, from https://www.forbes.com/advisor/investing/multi-level-marketing-mlm/

NextAdvisor. (2022, February 11). How Crypto Investors Can Avoid the Scam That Captured $2.8 Billion in 2021. NextAdvisor with TIME. Retrieved February 26, 2022, from https://time.com/nextadvisor/investing/cryptocurrency/protect-yourself-from-crypto-pump-and-dump/

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