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The Top 5 Signs of a Fraud Scheme

Posted by CFTC Staff /

I was shopping for a washer and dryer at a local home improvement store recently. I had an established budget and was ready to buy. After viewing several models in my budget, the sales person in the appliance section touted a deep discount on a high-end model that was out of my budget range. He said, “I’ve only got three sets of these left in the store, and at least 5 folks have expressed interest in buying. This discount won’t come around again for at least a year.”

Immediately, I felt the urge to purchase that washer and dryer set because I wanted to beat the competition and cash in on this limited time deal. Even though I knew what was happening, the emotional response was automatic. Because I recognized the tactic, I was able to tell the salesperson I’d be back in a few minutes. I used that time to call my wife and confirm our budget amount, and ultimately, I chose not to buy that model and go with a less expensive set. The salesperson got me emotionally invested in buying the more expensive, but discounted set, even though it wasn’t what I’d wanted.

These kinds of tactics are common in sales, and they aren’t always fraudulent. However, when those tactics are used in relationship to investing large amounts of hard-earned dollars, it is a good idea to ask, “Is this tactic being used to perpetrate a fraud?” Investors can overlook signs that an offer is potentially fraudulent. Emotions often override an individual’s ability to make a rational choice during an investment pitch. Knowing how to spot these tactics gives investors and traders the chance to slow down the process and ensure they are protected. Below are five very common tactics used to perpetrate fraud. Learn them and use them to stop the conversation to buy time to check out the broker and the product being sold. A few minutes of your time can save years of regret over losses.

What's the rush?

Investors should be cautious any time they are pressured or rushed into making a decision about an investment opportunity. Is the offer described as being good for only a limited time or in a limited quantity? Are you being led to believe you are part of a special group being notified? Take time to evaluate the offer and don’t allow yourself to be rushed into making any financial decision. Most legitimate offers will be there tomorrow.

Favors are rarely free.

When the person on the other end of the trade offers to do a “small favor” for you in return for a big favor, it may be a ploy to distract you from the business at hand. It’s best to stay focused on the opportunity, not to look for bargains.

Beware of the “Phantom Riches” tactic.

This is when a con artist dangles the prospect of unrealistic wealth, enticing you with something you want but can’t have. Consumers should consider whether the salesperson is dangling incredible returns or guarantees. It’s important to remember that all investments carry some risk.

Selling credibility.

This is when the con artist tries to build credibility by appearing successful, claiming affiliation with a reputable organization or touting a special credential or experience. A seller may have a corner office, framed diplomas or certificates and wear an expensive suit, but appearances really can be deceiving. Check out the seller’s actual qualifications at CFTC SmartCheck.

Watch out for third-party endorsements.

When someone talks about a lot of people you know investing in the opportunity and that you shouldn’t be left out, it’s probably a good idea to keep your hand on your wallet and your wallet in your pocket until you learn more.

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