BIGGEST STOCK INVESTING FRAUDS & HOW TO RECOGNIZE SCAMS

Have you ever been scammed? If not, you are one of the lucky few. Most people have fallen victim to a scam at some point in their lives, even though they may not readily admit it. Scams come in all forms, and the stock market is yet another platform through which people can lose money. As an investor, you need to be aware of some of the most telling signs of a scam to help you avoid such pitfalls? Ready? Let’s look at some past scenarios before getting into some tips you can employ in your investment strategy:

Biggest Stock Investing Scams

ZZZZ Best

What comes to your mind when you hear that a company could be worth millions of dollars one day? To most investors, that looks like an investment opportunity not worth forgoing, and many people would jump right on it. It is especially so if the company documents back the claim. Such was the case in 1986 when Barry Minkow tricked investors into thinking his carpet cleaning business was doing well.

Barry got investors and auditors to buy into his lie by creating thousands of fake documents & sales receipts and leasing a building in San Diego. When the time the company went public, it reached a market cap of $200 million. It was thus quite unbelievable when the organization came crashing down under the weight of its lies. Would you believe that Barry was a teenager at the time?

Centennial Technologies

Ten years after the previous shocker, another fraudster was at it again, this time by the name of Emmanuel Pinez. He stated that his company had recorded revenue worth $2 million from selling PC memory cards. It gets a bit funny (not for the investors, though). Apparently, the company was making money from selling fruit baskets! By peddling this lie to would-be investors, his stock value rose to $55 per share, a 451% increment.

Investors were soon to get quite a shock on realizing that the company had been reporting profits, yet it had been making losses. At some point, it even indicated profits worth a whopping $12 million after making a loss worth $28 million. Within the blink of an eye, the once-profitable stock plummeted to a meager $3, seeing investors lose their hard-earned money.

Enron

If you thought a fall from $55 to $3 was bad, wait till you see this scandal that hit the news in 2001. Enron was an energy-trading company based in Houston and was doing pretty well. If you were to ask the investors, they were sure they had landed on a cash cow. And who could blame their enthusiasm? After all, the company’s books were squeaky clean, and nothing seemed out of place.

But away from the public eye, the company was racking up debt to the tunes of hundreds of millions of dollars. All this took place without the public's knowledge, who scoured through the doctored books of accounts. The company’s management was well aware of how bad the situation was, and they used shell companies to aid their complex accounting practices. For each dollar they made, they would record this figure enough times to mask how badly the company was doing. By the time the reports went public, the accounts would look profitable and more investors would buy into the company. Quite a situation!

Analysts and investors were not to remain in the dark forever as it soon became clear how devious the management had been. In no time, investors were grappling with the fact that stocks that had once been worth $90 were now worth $0.30!

HealthSouth

Enron’s fall did not work as a warning to other companies that may have dared to ‘cook their books.’ If it did, the message did not reach HealthSouth, whose undercover activities came to light in 2003. It turned out that the CEO was so in search of a high stock price that he was not against coming up with false figures. He instructed his employees to come up with fake revenues to make the net operating income more attractive to potential investors.

The CEO, Richard Scrushy, could very well have appealed to investors without taking such drastic measures. After all, the company was growing fast and could have reached the heights he aspired. But greed led the way, and in no time, people could already see cracks in his story. It all started when the company sold shares worth $75 million in 2002 and afterward published an earnings loss. A law firm distanced the company sales from the loss.

Barely a year later, it became clear that the company’s earnings have been inflated by $2.7 billion. It was all thanks to the company’s CFO, William Owens, who had worked with the FBI to take down the CEO. Imagine a stock price going down by 97%! Investors had to come to terms with the reality that their stocks were now worth $0.11.

Tell-Tale Signs

We can get into many more cases, but the above examples are enough to shed light on how bad things can turn out even in the stock market. As much as trading or investing in the stock market carries risk, you would not want a situation where you can lose your money because of fraud-related activities. How can you make sure you stay safe?

Fact-Checking

Thanks to the internet, it has become much easier to verify information before acting on it. It helps to read about how scams present themselves and the various kinds. You will find it easier to spot red flags this way. For example, people often say that if something seems too good to be true, it probably is. That’s usually the case with stocks. Not all offers are fakes, but you need to research the stock and understand the deal you are getting.

Questioning a deal is always advisable. Let’s say someone comes to you saying that if you invest $500, you can recoup it within a month with profit. You have to ask yourself why someone would offer you such a deal. Do you have a relationship? Are they taking on the deal themselves? If it’s a stranger, why would they offer you such an opportunity? Maybe they think you are easy to scam and have approached you with this in mind. But sometimes, it can be an investment opportunity. In this case, we will take the example of a broker you have worked with before. Even then, you still need to check with other sources and ensure you are dealing with a legitimate deal.

It would help if you also learned more about stocks offered to you by brokers or investors. If the information provided is inadequate or unverifiable, you should proceed with caution and avoid handing out any money until you are sure about the deal. If the facts remain unverifiable after checking with other sources, it is best to walk away.

Payments

You may also come across a broker who wants you to pay for the services rendered beforehand, even if you had not agreed to such a transaction. It can get even sketchier where someone asks you to pay them through non-traditional means such as cash wires. If something about the deal feels off, feel free to walk away and seek reputable individuals or companies.

The Risk Factor

Investing and trading in the stock market carry a degree of risk, as does any other investment. So, if someone promises low risk and high returns, question it. While it could be legit, it is likely a scam, more so if the offer comes from a stranger.

With stock investing, you want to trust your gut such that if something does not feel right, you can trust yourself to walk away before you get pulled into a scam. You must also take your time with the investment and do not rush it, no matter the pressure your broker gives you. Think about it this way. The broker is probably rushing you because they know you will uncover the scam and change your mind before parting with your money. Ask questions, do your research, and if you suspect that the investment is a scam, notify the local law enforcement. All the best!

This article does not necessarily reflect the opinions of the editors or management of EconoTimes