There’s no shortage of news stories or social media warnings informing us about the latest scam or fraud to be watching out for. According to the Canadian Anti-Fraud Centre (CAFC) there were over 90,000 reports of fraud and cybercrime, with $530 million lost to fraud in 2022.¹

Although there are all types of fraud and scams currently victimizing Canadians—such as romance scams, grandparent scams and various ransomware attacks—this article will focus on investment scams and how to avoid them.

What are investment scams? 

An investment scam is a fraudulent scheme that promises investors high returns with little or no risk, but in reality is designed to defraud investors. Many fraudsters impersonate legitimate organizations and other entities, often government or financial institution representatives, to obtain sensitive information, steal money or convince others to "invest" in fake scams.

There is an old adage to keep in mind when you are offered high-return promises for no risk: there is no such thing as a free lunch. High returns are often accompanied by high risk and you should be wary when you are promised otherwise. There are many forms of investment scams, but they all share the same goal of deceiving investors out of their money. In 2021, investment scams were the highest reported scams based on dollars lost, with total losses of $163.9 million.² The majority of the investment scams reported involve Canadians investing after receiving a call or seeing a deceptive advertisement.

Types of investment scams

Cryptocurrency scam

Cryptocurrency scams and fraud are attempts to steal money as well as personal and financial information. Fraudsters will offer you cryptocurrency buy-ins promising a high rate of return in a short period of time. Instead, the victim will lose their investment and sometimes their personal and financial information.²

Not all cryptocurrencies are fraudulent (learn more about that in this article), but they operate independently of a central bank and are often unregulated in Canada. Cryptocurrencies also operate on decentralized networks by design, and their inherent anonymity makes them prime candidates for fraud. Proper storage (digital wallet, cold storage, etc.) and not sharing personal information like private keys becomes critical. The CAFC warns that there isn't the protection from fraud when using cryptocurrencies as there is when using a credit card. It’s also important to note that no government agencies will ever request payment in the form of cryptocurrencies.

Initial coin offerings and other crypto asset related scams

Crypto assets include cryptocurrencies, blockchain companies, cryptocurrency funds, initial coin offerings (ICOs), initial token offerings (ITOs), and initial exchange offerings (IEOs).³ Although cryptocurrencies are a form of crypto asset, not all crypto assets are cryptocurrencies. 

In recent years, certain crypto assets have generated interest from investors and the financial media. These products are considered high-risk because of their speculative nature. Some crypto coins with no true inherent value (other than a catchy trending name) have moved thousands of per cent higher in value over the course of a few months, only to make a precipitous drop of subsequent thousands. 

A common type of crypto asset scam, which the CAFC is warning against, is the initial coin offering (ICO) scam. Similar to an initial public offering (IPO), an ICO is an attempt to raise funds to help a company launch a virtual or cryptocurrency. In an ICO scam, the fraudsters create a fake ICO and solicit investments from unsuspecting investors, often promising high returns and low risk. 

A fraudster may claim to place an investor’s money in a proprietary crypto asset trading platform, while promising high, guaranteed returns with little or no risk. Once the investor invests, often by using a digital currency, generally one of two things will happen:

• The fraudster may stop communicating with the investor. The fraudster may then transfer the investor’s money overseas, making it very difficult for the investor to get it back.
• Alternatively, when the investor checks their account on the crypto asset trading platform, it may show that the investment has gained value quickly,  however, the stated profits are fake. The fraudster may strongly encourage investors to invest additional funds, or ask the investor to send more money (for taxes or fees) in order for the investor to withdraw the non-existent profits. The fraudsters then transfer the investor’s original and subsequent deposits overseas, thus, victimizing the investor repeatedly. 

In early 2022, the Canadian Securities Administrators (CSA) issued a warning about fraudulent investment solicitations involving crypto assets. The fraudsters target investors with the guise of getting in “on the ground floor” with crypto assets and take advantage of the investor’s fear of missing out. The CSA has a caution list of firms and individuals that investors should avoid. 

The “pump and dump”

A pump and dump scam is a type of investment fraud where the scammer (or group of scammers) promotes an incredible deal on a low-priced stock through false or misleading information. The promoter owns a large amount of this stock. And as more investors buy shares, the value is artificially inflated. Once the price hits a peak, the scammer sells their shares at a profit, leaving other investors with losses and enhanced challenges exiting their positions (limited market of willing buyers). 

Promoters often use social media, online forums or other channels to create a sense of excitement. A recent example of an alleged pump and dump scheme is the cryptocurrency EthereumMax (EMAX). Heavily promoted by celebrities and sports figures, the price rose thousands of percentage points before losing almost all its value. According to allegations in a class action lawsuit, the pair of promoters took advantage of the celebrity endorsements and pocketed millions of dollars in profits. Many of the celebrities that endorsed EMAX have subsequently faced fines from the US Securities and Exchange Commission for not disclosing the financial incentives they received for promoting the EthereumMax tokens.⁴

Ponzi schemes

A ponzi scheme is a fraudulent investment offering higher-than-normal returns, in which returns are paid to earlier investors using the capital invested by new investors, rather than actual profits. Investors believe their investment is returning higher-than-average profits, but the scheme will eventually collapse when there are not enough new investors to sustain the promised returns. A well-known ponzi scheme is the scheme operated by Bernie Madoff which was exposed in 2008. Madoff’s scheme defrauded investors of billions of dollars and he was ultimately sentenced to 150 years in prison. He died in prison in 2021 at the age of 82. A more recent, and closer-to-home case resulted in the loss of $1.5 million dollars to investors in British Columbia. Although the Ponzi scheme was orchestrated in the US, three individuals from B.C. have been sanctioned and fined for their role in the fraud. The promoters marketed a phantom gold-mining scheme that promised extraordinarily high, no-risk returns on supposed lucrative gold-mining operations in Mali and Brazil. None of the investments were used for gold mining. The only source of revenue for the company was money from new investors. A total of $6,000,000 was diverted by the scheme’s US-based organizer for his own personal use. The losses incurred by the victims were far more than just financial losses, personal relationships with family and friends were also fractured as a result of this scheme.⁵

These are just some of the investment scams to be aware of. There are others, including, but not limited to: fraudulent franchise or business opportunities, gem scams and pyramid schemes. To learn more refer to: Investment Fraud, CAFC.