How to Spot Investment Scams & Ponzi Schemes

Red Flags You Shouldn't Ignore

Guaranteed Returns / No Risk

All legitimate investments carry risk. When someone promises guaranteed returns or claims there's no risk, they're lying. Even government bonds have inflation and interest rate risk.

Pressure Tactics: "Limited Spots," "Act Today"

Legitimate investments don't disappear overnight. Scammers use artificial urgency to prevent you from doing proper research or consulting with others.

High-Pressure Warning Signs:

• "This offer expires tonight" - Real investments have proper offering periods
• "Only accepting 10 more investors" - False scarcity tactics
• "You must decide now or miss out forever" - Preventing due diligence
• "Don't tell anyone about this opportunity" - Legitimate investments are openly marketed

Complex or Secret Strategies You're Not Allowed to Understand

If you can't understand the investment, don't invest. Scammers use complexity to hide the fact that there's no real investment strategy.

Unregistered Sellers or Products

Always verify registration with your national securities regulator. In the US, check FINRA BrokerCheck and SEC records. In Canada, use CSA resources.

What to Verify:

• Advisor registration: Licensed to sell securities in your jurisdiction
• Product registration: Investment product is properly filed
• Company registration: Business is legally incorporated and compliant
• Track record: Verified performance history (not testimonials)

No Third-Party Custodian (Money Goes Straight to Promoter)

Legitimate investments use independent custodians. Your money should never go directly to the person selling the investment.

Returns Are Unusually Smooth Month After Month

Real investments have volatility. Ponzi schemes often show impossibly consistent returns because they're not actually investing your money.

Suspicious Return Patterns:

• Exactly 1% every month regardless of market conditions
• Never a down month over multiple years
• Returns uncorrelated with claimed strategy (e.g., "stock trading" that never goes down)
• Performance too good to be true compared to market benchmarks

Affinity Angle: Using Shared Community/Identity to Build Trust

Scammers exploit trust within communities. They target religious groups, ethnic communities, professional associations, or social clubs.

How Affinity Scams Work:

• Join respected community groups to build credibility
• Use shared identity to lower skepticism
• Recruit community leaders as unwitting promoters
• Exploit trust networks for rapid expansion

How to Verify Before You Invest

Check Registration: Look up the Advisor and Firm

Always verify credentials with your national securities regulator. This is your first and most important step.

Validate Custody: Ensure Funds Sit with a Reputable, Third-Party Custodian

Your money should be held by an independent, regulated custodian. You should receive statements directly from the custodian, not just the investment adviser.

Reputable Custodians Include:

• Major banks: JPMorgan Chase, Bank of America, Wells Fargo
• Specialist custodians: Charles Schwab, Fidelity, Vanguard
• Prime brokers: Goldman Sachs, Morgan Stanley, UBS
• Independent custodians: BNY Mellon, State Street, Northern Trust

Demand Documentation: Audited Financials, Prospectus/Offering Memorandum

Professional investments come with professional documentation. If they can't provide proper legal documents, walk away.

Required Documents:

• Audited financial statements by a recognized accounting firm
• Prospectus or offering memorandum with complete risk disclosures
• Legal opinions confirming structure and compliance
• Performance track record verified by independent sources

Search Complaints/News: Look for Enforcement Actions or Investor Alerts

Research the people and companies involved. Check for regulatory actions, lawsuits, or negative news coverage.

What to Search For:

• SEC enforcement actions against the adviser or firm
• FINRA disciplinary history and customer complaints
• Court records for civil or criminal cases
• News articles about the investment or promoters
• Better Business Bureau complaints and ratings

Start Tiny: If You Proceed at All, Begin with Money You Can Afford to Lose

Even after due diligence, start small. Invest only what you can afford to lose completely, and never put all your money with one adviser.

Get a Second Opinion: Independent Advisor or Accountant

Consult with a fee-only financial planner or CPA. They can provide objective analysis without any sales motivation.

If You Think It's a Scam

Stop Sending Money Immediately

Cut off all financial ties right away. Don't send another dollar, even if they claim you need to "complete the transaction" or "pay fees to withdraw."

Document Everything: Emails, Pitch Decks, Bank Transfers

Preserve all evidence for authorities and potential recovery. Save everything in multiple formats and locations.

Report to Your Securities Regulator and Local Law Enforcement

Report immediately to help stop the scam and potentially aid recovery. The sooner authorities are notified, the better chance of stopping the scheme.

Where to Report:

• SEC Office of Investor Education and Advocacy (investor.gov)
• FINRA Investor Complaint Center (finra.org/investors)
• FBI Internet Crime Complaint Center (ic3.gov)
• State securities regulator in your state
• Local police for criminal fraud reporting

Alert Your Bank to Try to Halt or Recall Transfers

Contact your bank immediately to report fraud. They may be able to stop pending transfers or help with recovery efforts.