5 Biggest Financial Scams (And How To Avoid Them)

Summary

This video explores five common financial frauds and how to protect yourself from them. It begins with Ponzi and pyramid schemes, explaining how new investments fund returns to earlier investors. The video then highlights 'pump and dump' stock scams, IRS phone scams, and phishing attempts, where scammers pose as legitimate entities to steal personal information. The key takeaway is to remain skeptical of offers that seem too good to be true, verify investment opportunities, and never share personal details without confirming the identity of the requester.

Takeaways

• 💸 Ponzi schemes involve using new investors' money to pay returns to previous investors. The most famous was by Bernie Madoff, who scammed billions.
• ⚠️ Pyramid schemes are similar to Ponzi schemes but rely on recruiting new members who pay a fee, with no real product or investment behind it.
• 📈 Pump-and-dump schemes inflate a stock's value through false information, leading investors to buy in before scammers sell at a profit, causing the stock to crash.
• 🛡️ The IRS will never contact you by phone or email first, demand specific payment methods, or threaten local law enforcement action for non-compliance.
• 🤥 Phishing scams often use emails or messages posing as legitimate organizations to steal personal information through fake websites or direct inquiries.
• 📞 Scammers may impersonate bank employees, asking for personal details under the guise of verifying unauthorized transactions.
• 🧾 Always verify suspicious financial contacts by reaching out to the company or organization directly using official channels.
• 📊 Multi-level marketing (MLM) companies, while legal, can sometimes resemble pyramid schemes if they prioritize recruitment over actual product sales.
• 🔍 Before investing, check a broker’s background and complaint history through FINRA’s broker check to ensure they are trustworthy.
• 💡 The old saying 'if it sounds too good to be true, it probably is' applies to most financial scams; always be skeptical of unrealistic promises.

Q & A

What is a Ponzi scheme, and how does it work?

A Ponzi scheme is a type of financial fraud where new investment money is used to pay returns to earlier investors, rather than from actual profits. The scheme relies on attracting new investors, and when this stops, the entire structure collapses.

Who was Charles Ponzi, and why is his name associated with this scheme?

Charles Ponzi was an infamous fraudster who promised a 50% return in 45 days by investing in mail order coupons. His scheme involved using new investments to pay off earlier investors, and when it collapsed, Ponzi owed $7 million. He spent 14 years in jail, and since then, similar schemes have been called 'Ponzi schemes.'

How can you protect yourself from a Ponzi scheme?

Before accepting an investment opportunity, you can check the broker’s background and complaint history on FINRA's BrokerCheck.org. Additionally, you can request written proof that the investment professional is a sworn fiduciary.

What is the difference between a pyramid scheme and multi-level marketing (MLM)?

A pyramid scheme focuses on recruiting new members, where each person pays an entry fee, and returns come from signing up others. In contrast, MLMs involve selling products, and the Federal Trade Commission ruled that companies like Amway were legal because profits were earned from product sales, not just recruitment.

What are the warning signs of a pyramid scheme?

If a business stresses recruitment over selling actual products or services, it may be a pyramid scheme. You should ask for information about the success ratios of new members and how the company generates its profits.

What is a pump-and-dump scam?

A pump-and-dump scam involves artificially inflating the value of a stock through aggressive promotion, cold calling, or fake news. Once enough investors buy in, the scammers sell their shares at the inflated price, causing the stock's value to crash and leaving other investors with significant losses.

How can you avoid falling victim to a pump-and-dump scam?

Be cautious of unsolicited stock tips or promises of quick riches. Always ask yourself why someone would share valuable investment information with you, and do your own research before investing in any stock.

What are some common tactics used in IRS phone scams?

In IRS phone scams, scammers claim you owe additional taxes and must pay immediately, often threatening arrest. The real IRS will never contact you by phone first, never demand payment in a specific form, and never threaten arrest for non-payment.

What is phishing, and how can it lead to identity theft?

Phishing is when scammers send emails that appear to be from trusted sources, asking you to enter personal information like passwords or credit card details on fake websites. This information is then used for identity theft.

What general advice should you follow to protect yourself from financial scams?

Never give out personal information to someone who contacts you. Always verify the identity of the person or organization by contacting them directly through official channels, and remember that if something sounds too good to be true, it probably is.