Investment fraud: how it works and how to avoid it

Investment fraud is a scam in which you're asked for money to invest in something that doesn't exist, isn't worth what they claim or never actually gets bought. It almost always combines three ingredients: a high, guaranteed return, pressure to decide fast and an asset you can't verify on your own. It's the type of fraud that moves the most money: in 2024, the FTC received reports of $5.7 billion lost to investment scams in the US, out of $12.5 billion lost to fraud overall. Before you invest, the SEC's Investor.gov and the FCA's ScamSmart are the two official places to start.

What exactly is investment fraud?

It's any deception in which the victim hands over money believing they're buying a return. The disguise changes: a country's bonds, certificates of deposit, stamps, wine, gold, crypto, shares in a company that's “about to go public.” The core doesn't: the money doesn't go where they tell you. Sometimes it's never invested; sometimes it's invested in something worth far less than what you're charged; sometimes it's used to pay earlier investors, which is what defines a Ponzi scheme.

Almost every type of financial scam we explain at MATERIUM fits inside this family: Ponzi schemes, pyramid schemes, pump and dump schemes, accounting fraud and crypto scams. What they share is that the scammer sells a future (interest, appreciation, profits) and collects in the present.

How do investment scams work, step by step?

1. The hook. An ad on social media, a phone call, an acquaintance who's already made money. The offer usually feels exclusive: “limited spots,” “only for select clients.”
2. The promise. A return far above normal and, at the same time, no risk. That combination doesn't exist in real markets: the higher the return, the higher the risk.
3. The set dressing. Brochures, flawless websites, offices, certificates, statements with your name on them. In 1822 it was a map of an invented country; today it's an app with charts that keep going up.
4. The first payouts. The scammer often pays at the start to win your trust so you'll invest more or bring in others. That money comes out of your own deposit or other clients' deposits.
5. The freeze. When you try to withdraw, obstacles appear: fees, taxes, “verifications.” Each obstacle is one more payment.
6. The vanishing act. The website goes dark, the account manager stops answering or the company goes under. Sometimes a second scam follows: someone offers to get back what you lost in exchange for a fee.

What are the red flags of investment fraud?

These are the warning signs that keep showing up in documented cases and in regulators' alerts:

• High and guaranteed returns. One of the two is a lie. If someone guarantees you 10% a month, someone is lying to you.
• Pressure. “Today's the last day,” “only three spots left.” Pressure exists so you won't check. The FCA's ScamSmart lists it among its first warning signs, along with offers that sound too good to be true.
• It isn't registered. The firm doesn't show up on FINRA BrokerCheck, the SEC's adviser search or the FCA Register, or the name looks like a real firm's but the website isn't the same.
• You can't see the asset. There's no independent way to confirm that what you're buying exists and is in your name.
• The paperwork is produced by the seller. Statements, certificates and audits that don't come from a third party.
• You're asked to pay to get paid. Up-front fees or taxes to release your profits.
• Unsolicited contact. They call or message you without you asking, or the ad uses a celebrity's face.

If you want to run a specific offer past these red flags, use the scam checker and the guide on how to check if a broker is legit.

What real cases prove it?

Gregor MacGregor and Poyais (London, 1822). MacGregor placed bonds in the City of London for a Central American country that didn't exist: £200,000 at 6%, like those of any real state. He also sold land to settlers: of the nearly 250 who arrived, about 180 died. It's investment fraud in its purest form: an invented asset with perfect set dressing. We tell the story in the case of Gregor MacGregor. His is Law of Deception No. 2: “If the lie is big and detailed enough, nobody checks it.”

Allen Stanford (Antigua, until 2009). His Caribbean bank sold certificates of deposit paying nearly twice the interest of a US bank. It reported a 15.71% return in 1995 and exactly the same in 1996. Many of the victims were Latin American families, especially Venezuelans, looking to protect their savings. He was sentenced in 2012 to 110 years for a $7 billion fraud. It's all in the case of Allen Stanford.

Bernard Madoff (New York, until 2008). The biggest investment fraud in history by amount: his clients lost about $17.5 billion in principal. He promised little, a moderate and steady return, and that's why it lasted for decades. He was sentenced in 2009 to 150 years. Read the case of Bernie Madoff.

Why do people fall for investment scams?

Because they trigger the five levers we study at MATERIUM: greed (the return), trust (the acquaintance who already got paid), authority (the prestigious manager, the official-looking brochure), fear of missing out (the pressure) and shame, which makes many victims slow to report it. We explain it in why people fall for scams, and the Laws of Deception sum it up, especially Law of Deception No. 4: “Impossible returns always find believers.”

What should you do if you suspect an investment?

Before you pay:

1. Check the register. In the US, look up the firm and the person on FINRA BrokerCheck and in the SEC's search for investment professionals on Investor.gov. In the UK, check the FCA Register and the FCA Warning List of unauthorized firms.
2. Check the website. The domain must be exactly the one listed in the register. Clone firms copy the names of real ones.
3. Ask in writing where the return comes from and who holds your money. If the answer is vague, you already have your answer.

If you've already paid:

1. Don't pay anything else, not fees and not taxes to “release” your money.
2. Keep the evidence: transfers, messages, screenshots of the website and names.
3. Call your bank as soon as possible in case a transfer can still be stopped.
4. Report it. In the US, to the SEC through its tip and complaint form, to the FTC at ReportFraud.ftc.gov and, if it happened online, to the FBI's IC3. In the UK, to Report Fraud, the service that replaced Action Fraud, and tell the FCA.
5. Be wary of anyone who offers to recover your money. That's a recovery scam, a second fraud.

If you live elsewhere, check with your own country's regulator, which publishes its own registers and warnings. And if you've already lost money, there are more steps in what to do if you get scammed.