Investment Fraud cases explained

Investment fraud cases are prevalent in the UK, with the number of investment scams rising year-on-year. Between September 2019 and September 2020, just over 17,000 reports of investment fraud were submitted to Action Fraud. This was a 28% increase compared to the same period last year and amounted to £657.4 million in reported losses. Similarly, The Financial Times reported that the first half of 2019 saw more than double the number of investment banking fraud cases than in 2018.

The high incidence of investment fraud in the UK makes it a growing topic of interest as individuals seek to understand these scams and how they operate. So, we’re going to take a detailed look into investment fraud scams and explain what investment fraudsters do, the most common types of investment fraud, recent investment fraud cases, and what to do if you’re accused of investment fraud.

What is Investment Fraud?

Put simply, investment fraud occurs when investment fraudsters deceive potential investors into making purchases based on false information. Legitimate companies may lie to potential investors, saying they are making a larger profit than they really are in order to secure investment by falsifying audits and other company statements. Alternatively, fraudsters may set up fake companies or fake investment opportunities to scam victims into investing.

Perpetrators of investment fraud scams rely on persuasive and convincing pitches to fool victims into giving them money. Some victims may only realise months down the line that they have fallen victim to investment fraudsters as they may have received an early return on their investment to reassure them.

Common Types of Investment Scams

Investment scams can come in many forms. Some of the most common types of investment scams are:

  1. Pyramid Schemes

The pyramid scheme is one of the most well-known types of investment fraud. Pyramid schemes can be difficult to spot because many companies work around the legislation to be recognised as legal ‘Multi-Level Marketing’ or ‘Direct Marketing’ companies. These schemes can be so seductive that it’s not uncommon for the people involved not to have realised they’ve been taken in by a pyramid scheme.

Individuals are usually first contacted by a family member, friend or acquaintance who wants to share more information about their new business opportunity. This often extends to an invitation to a recruiting event, coffee meeting or a proposition via social media, email, phone or even post.

The rep will be friendly and enthusiastic and have an answer for everything – often, from a script. There may be attempts to recruit the individual with enticing perks, such as flexible working, a company car, and a guaranteed income.

At first, the rep will ask the individual to invest large upfront costs for a ‘starter’ pack or products. They’ll be promised a small commission for any products sold, and promised a bigger return if they go on to recruit others to join. This is because pyramid schemes rely on fees from new recruits and not from the sale of actual products.

Pyramid schemes are not sustainable and only benefit the people at the top of the scheme. The reason for this is that reps earn money from the recruits below them, but eventually, the member pool will dry up. When that happens, top-level reps walk away with substantial ‘earnings’. However, newer recruits with fewer recruits below them will not only leave empty-handed but also having lost their initial investments. Hence, a pyramid scheme can be classed as a type of investment scam.

  1. Affinity Fraud

Fraudsters involved in affinity fraud typically target members of a group based on race, age, religion, etc. Affinity fraud is one of the types of investment fraud that shares close similarities with pyramid schemes. Often, the affinity fraudster uses a pyramid scheme to reel members in. They might even pretend to be a member of the targeted group to gain trust.

Notable cases of affinity fraud have involved fraudsters conning the leaders of religious groups who have influence over their congregations. Similarly to the warning signs of pyramid schemes, these con artists promise large profits and may pressure victims into investing.

  1. Pump and Dump Fraud

Pump and dump is a type of investment fraud where fraudsters build a portfolio of potential investors and pitch them a deal on low-priced stock. The fraudster owns a large amount of the stock they are selling, which might not necessarily represent a legitimate business. However, as increasing numbers of investors buy shares in this stock, the value suddenly rises – ‘pumping’ the stocks. This is when the investment fraudster ‘dumps’, selling their own shares before the value of the stock crashes. The conman then walks away with a large amount of money, and the investors are left with worthless stocks.

Cold calling traditionally was the most prevalent method of pump-and-dump schemes. However, with the rise of the internet, this illegal scheme has moved to online practices such as posting false claims online to lure investors in to buy stock quickly.

  1. Offshore Scams

Offshore scam artists will promise spectacular profits if you send sums of money ‘offshore’. This is because, in most cases, the aim is to avoid or lower taxes by sending money to a tax haven. It is likely that the company you believe you are sending your money to is fake or set up to merely funnel investor funds to the fraudsters. It is likely that the fraudsters will inform you that your money will flow in and out of your account and you witness this activity. However, it is also likely that your money is in fact going to a feeder account, which is clearing money out of your account.

The drawbacks of offshore scams are that you may end up owing the government money in back taxes, interest or penalties for taking part in a tax avoidance scheme.

Types of investment fraud that are based offshore are especially risky as you may struggle to recover your money if something were to go wrong overseas.

Common characteristics of offshore scams include:

  • Individuals are not registered with a securities regulator.
  • Promises of high returns, insider information or tax savings.
  • Provided documents do not contain audited financial statements or information regarding the investment or management.
  1. Boiler Room Scams

The term ‘boiler room scams’ refers to the idea that the sales environment creates the pressure of a boiler room due to the high pressure sales tactics utilised by the fraudsters. Boiler room scams is a type of investment fraud that’s on the rise because fraudsters are becoming increasingly convincing.

A fake stockbroker might contact you via telephone or online and share ‘insider knowledge’, pressuring you into buying shares which they ‘know’ are about to become very valuable. In reality, the shares are worthless, and the fraudster will sell them for a high price. As a result, the investor is left with a financial loss and worthless, unsellable stock.

The fraudster may request for the victim to transfer their money for the shares to an overseas bank account or even a UK bank account. The fraudster can make a profit from simply taking your money without handing over your shares, selling genuine shares at highly inflated prices or presenting you with a supposedly “valid” share certificate. And, it doesn’t always stop here as fraudsters are also known to sell on their contact lists to other scammers.

  1. Advance Fee Fraud

Advance free fraud offers the promise of high returns in goods, services and/or financial gains, for example, in exchange for an advance fee up front in order for the deal to go through. Usually, the scammer targets someone who is vulnerable due to their age, youth, or disability.

Examples of advance fee fraud include:

  • Career opportunity scams
  • Dating scams
  • Lottery or prize draw scams
  • Inheritance fraud
  • Vehicle matching scams
  • Loan scams
  • Rental fraud
  • Clairvoyant or psychic scams
  1. Clone Scams

Not only are clone investment scams difficult to spot, but many people don’t know what they are. In fact, the Financial Conduct Authority (FCA) reported that 77% of investors admitted they were unsure what a clone investment firm was.

Clone investment scams involve fraudsters setting up fake firms that appear identical to a genuine firm, i.e. they ‘clone’ the genuine firm. The scammers clone the name, address and even the ‘Firm Reference Number’ (FRN) of genuine companies authorised by the FCA.

Investment fraudsters will then contact potential investors with fake sales materials that are linked to the genuine firm. The scammers may even encourage potential investors to look up the firm’s FRN on the FCA Register to convince them that this a genuine opportunity.

Due to the Covid-19 pandemic and the consequent economic challenges the UK is facing, investors are especially vulnerable and keen to find good investment opportunities, even if they’re too good to be true. According to the BBC, reports of clone firm investment scams rose by 29% in April 2020, during the first national lockdown, compared with the previous month.

Recent Investment Fraud Cases

Let’s look at some examples of the biggest investment fraud cases in recent years.

  1. OneCoin – 2016

While the more traditional types of investment fraud are still at the forefront of the financial crime landscape, new investment scams are on the rise.

One of the more infamous recent investment fraud cases has been an international talking point, especially since the mastermind behind it has gone missing. This particular case combines Ponzi fraud with a cryptocurrency scam and has fleeced a huge number of investors across the globe.

It began with a cryptocurrency called OneCoin which was very convincingly and charismatically marketed as Bitcoin’s biggest rival, promising investors huge returns. The scam was so convincing that British people invested almost €30m on OneCoin in the first six months of 2016.

In reality, OneCoin wasn’t an established cryptocurrency and lacked credibility and accountability. Additionally, it wasn’t even ready to be traded. Any increase in value seen by investors was simply manufactured inhouse.

Not only was the cryptocurrency making money from unwitting investors, but it was also being operated as a pyramid scheme with the founder selling OneCoin to members of multi-level marketing schemes, who would then profit by convincing others to purchase it. You can read more about this particular case in a recent BBC article which explores the case in depth.

The rise of cryptocurrency and the success of Bitcoin will inevitably create more opportunities for investment fraudsters to target potential investors. If you are concerned you or your client are being investigated for a cryptocurrency investment scam, please contact our cryptocurrency barristers.

  1. James Paul Lewis Jr. – 2003

For over two decades, James Paul Lewis Jr. used a pyramid scheme and conducted affinity fraud to scam investors. Lewis collected over US$300 million worth of  ‘investments’ from fellow members of the Mormon Church, promising the investors annual returns of up to 40%. Instead, their ‘investments’ funded his luxury lifestyle, including luxury cars and grand homes.

In 2003, as the number of new investors ran dry, Lewis stopped paying the ‘dividends’ and suspicions arose. Lewis was arrested in Texas in 2004 and was sentenced to 30 years in prison for his involvement in this investment fraud case.

  1. Michael Nascimento – 2018

Michael Nascimento and his accomplices conducted boiler room scams for just under four years. Victims were targeted via cold-calls and were pressurised to purchase ‘lucrative shares’ in a company that owned land in Madeira. Extortionate guaranteed returns of between 125% and 228% were promised to victims.

The investors were fed a series of lies about this fake investment opportunity, including that the scheme was partnered with Barclays Bank. These promised returns were never received by the investors and, instead, their investments were used to fund Nascimento’s lifestyle.

This was the second largest criminal prosecution by the FCA, making it a significant recent investment fraud case in the UK.

How Do Investment Banking Fraud Cases Differ from other Forms of Bank Fraud?

While all types of investment frauds cases and bank fraud are initiated by fraudsters with the same end goal in mind – to dishonestly receive someone else’s money – the modus operandi of the fraud varies.

For example, banking and insurance fraud can often operate on the basis of phishing and identity fraud in order to undertake covert theft. The perpetrator can often achieve this through hacking, impersonation, email or phone call and doesn’t tend to engage in long term pursuing of their victims. On the other hand, some investment frauds cases are carried out by acting as a reliable party and investing time into manipulating individuals into handing over funds.

Common Signs of Investment Fraud

  • Too good to be true: If an offer seems too good to be true, then it probably is. This is especially relevant since the UK economy took a financial hit throughout the pandemic, and interest rates are low across the board.
  • The firm isn’t authorised by the FCA: If the company isn’t on the FCA’s register this is a clear sign they are illegitimate; all firms providing regulated financial services in the UK must be authorised by the FCA. The FCA’s ScamSmart warning list also includes businesses that have been involved in investment fraud cases.
  • The ‘Halo Effect’: Investment fraudsters may come across as overly-friendly, trustworthy and likeable in order to convince their potential victims that they are genuine.
  • Pressure of immediacy: If a company stresses immediacy and uses pressurising techniques, this is a red flag. The company may stress that there’s a rapidly growing number of people investing to convince a potential investor to act fast.

Investment Fraud Barristers

Our team of leading fraud barristers are equipped to advise and represent in all manner of investment fraud cases. If you or your client are being investigated for investment fraud, it’s important to seek professional legal advice. Please get in touch with us for assistance.

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