Well, well, well, it’s already Wednesday, the middle of the week, the time when everybody starts thinking about the weekend (as if they haven’t been doing so since the last weekend).  It’s also a good time to cover one of those unfortunate, but necessary, topics: avoiding scams and the scammers who would like nothing better than to take your money.  I’m not going to be able to cover all the types of scams out there, as that number clocks into the millions (and even more sadly, increases all the time), but these few general tips should help you to avoid most of the scams that are out there:

1. Don’t Put All Your Money In One Investment or Firm: If you find a highly successful investment, it’s tempting to put ever increasing amounts of money into said investment.  After all, why keep your money where you are earning a paltry return when you could be earning a much higher level of income with one sweet investment?  Well, one reason is because that sweet investment might not be all that it’s cracked up to be (ask anyone who invested with Bernie Madoff).  By keeping your investment money in a variety of investments at different companies, you can prevent a scam (or even a more common occurrence, like poorer than expected investment returns) from derailing your monetary plans.

No, no, no, those are COLOR schemes; that's not what we're talking about all!

2. Know Your Scams: It’s much easier to spot a potential scam if you know what sort of scams are out there.  While there are a nearly endless number of scams and schemes that have been tried in the past (and probably an endless number that will be tried in the future), they tend to fall into a limited number of different broad categories.  If you learn to recognize the most common types of schemes that are used, like Ponzi Schemes, Pyramid Schemes, and Advanced Fee Scams, you’ll be in a much better position to protect yourself if they are tried on you.

3.Watch Out For Out-Sized Return Claims: It’s a fact of life: we’d all like to make big money with little time or effort.  It’s also a fact of life that the opportunities to do so tend to be few in number and limited primarily to people who really don’t need more money (say, the billionaire daughter of a wealthy hotel magnate).  If you do receive an email, letter, or even a phone call offering the opportunity to earn thousands of dollars for a few hours of work, or talking about investments that can return 200% of your invested money in days, be skeptical, and assume that they are highly delusional, at best, and scams to get your money at worst.  Speaking of unsolicited email and phone calls…

4. Don’t Give Out Personal Information UNLESS You Initiate Contact: Many scammers, online and off, want to get your personal information, in order to get to your money or apply for credit under your name.  If you limit the organizations you provide such personal information to those you contact (rather than the ones that contact you), you can minimize the chance that your personal information will be taken and misused.   It’s not impossible for illegitimate organizations to get your personal information if you follow this advice (particularly if they sound like a legitimate offer, such as those mentioned above), but you’ll greatly decrease both your risk and the chances that you’ll suffer big losses.

5. Don’t Give Cash To People You Don’t Know: There are lots of opportunities nowadays for you to find yourself wanting to give money to people you never met, from online ‘friends’ to Nigerian Princes with gobs of money they want to get out of the country.  Resist this urge: unfortunately, there are far too many people online who will pretend to befriend you or beg you for help, only to take advantage of your generosity.  Don’t give in, or you’ll simply encourage them to take advantage of other people (as well as finding yourself out hundreds or even thousands of dollars).  Be particularly wary if they want you to wire them the money; this is a favorite method of scam artists due to its untraceable (and unrecoverable) nature.

6. Keep An Eye On Your Finances: It’s possible, in spite of all the advice just given, that you’ll find yourself the victim of some sort of scam.  It can happen to the best of us.  If you keep watch over your finances, you can catch problems like this (as well as other financial problems, like overspending or investment under-performance) before they cause you too much trouble.  It’s not always easy to do, but the money and effort you can save by knowing where your finances stand and whether there are any unexpected problems is well worth it.

What tips do you have to avoid scams?  How would you suggest preparing yourself and your bank account(s) to keep your money safe?

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It’s becoming almost a monthly event: there was a security breach last week, allowing hackers to access people’s personal information.  I mentioned a few months ago about how the Playstation Network was hacked (and subsequently shut down), certainly a dark day for most online gamers.

Now, though, it’s a major bank, specifically Citibank, that has been hacked.  To add insult to injury, the method used by the hackers sounds like something I could do, and since I am barely tech savvy enough to keep this blog up and running, that’s something.  By opening their own accounts, signing in, and replacing their account numbers with the account numbers of other bank customers in the web address line, the hackers were able to acquire personal information from a number of Citibank customers.  It is almost scary how easy it sounds to do that.

It's amazing how easy it has apparently become to get credit data from online sources.

Now, with such high profile break-ins in the news, you might be a little worried about your online security.  Unfortunately, much of the ability to protect your secure information is out of your hands; you can do everything right, but if your bank (or credit card company, or any number of places where you have some personal finance information stored) ends up being hacked or otherwise has its security compromised, your personal information could still fall into the wrong hands.

Still, that’s no reason to make it easier for hackers to get to your personal data.  While there are some things that are outside of your control (how your bank formats their account web addresses and the ability to leap from one to the other, for example), but there’s still plenty you can do to help keep your financial information to yourself.  For example, you can:

1. Be Careful When Contacted By Email: In our increasingly wired society, there is a good chance that you receive some (or even all) of your correspondence with your bank(s) via email.  Unfortunately, the same advantages of email for your bank (cheap, quick, easy to automate) also make it advantageous for those who want to gain access to your account illicitly.  The best thing to do: treat every email like it may be fraudulent, and use the appropriate caution.  If you are contacted by one of your banks and told that you need to log in to deal with some issue online, got to the bank’s website directly, sign in to your account, and deal with the issue (if there is an issue) that way.  That way, you won’t accidentally give your personal information to inappropriate sources.  On that note:

2. Don’t Give Out Financial Information UNLESS You Initiate Contact: If you want to engage in all the advantages of online commerce, you’re going to have to provide your financial information to someone.  But only do so when you started the transaction.  If you receive an email or other contact that wants your personal information, just say no.  Instead, as above, make sure that you, personally, enter in the appropriate website and ONLY provide your information when you are sure about the company you are dealing with.

3. Be Careful About Social Networks: It’s very tempting to drop your guard when you are on Facebook, Twitter, Linkedin, and the numerous other social networking sites out there.  After all, you are surrounded by ‘friends’ and ‘followers’; why would they want to hurt you?  Unfortunately, social networks are an attractive target for hackers; from sending out emails posing as the social network operators to creating fake profiles to worm their way into your list of friends, those who mean you harm have lots of ways to take advantage of social networks.  A good guideline to follow: don’t share any information on social networking sites (whether on a public ‘wall’ or in a private message) that you would not want to be shouted out loud on a crowded street corner.  (On a similar note: Be cautious about what you share on social networking sites, period; sure, now you have no problem with pictures of you chugging beer and flashing the camera, but ten, twenty, thirty years from now, do you really want your children, friends, or coworkers to have pictorial proof of your wild-child days?)

4. Keep An Eye On Your Accounts: Just in case you are getting the feeling that computers cause nothing but trouble, let me put your mind at ease: computers can be a great asset in preventing illicit activity.  If you make sure to monitor your accounts on a regular basis, you can be sure to catch any fraud before it gets too far, allowing you to prevent the worst of the damage.  If you do notice anything is wrong, be sure to contact your bank or other financial institution so they can work with you to prevent further theft (and hopefully reverse the theft that has already happened).

5. Make Your Passwords Hard to Guess, and Change Them Regularly: I’ve discussed the importance of changing your passwords at least twice a year before, but it bears repeating.  (Of course, you can (and if you fear you’ve been hacked, should) consider changing them more often, but I understand that it’s hard enough to keep track of all the passwords you need nowadays without changing them every two weeks.)  You’ll be less likely to have your accounts hacked if your passwords are complex (with letters (both capitalized and lower case), numbers, and symbols, if possible) and difficult for someone else to guess.  A password like ‘Abc123′ is just begging to be guessed, while something like ‘Meh27nE19%’ is unlikely to guessed by random chance.  Make sure you write down your passwords somewhere safe (encode them if you want an added layer of security), don’t share with anyone, and change them regularly (and not just by shifting one letter at the end), and your accounts will be much more secure.

There you have it, several ways to make sure that your banking is as safe and secure as possible.  Here’s hoping that when the next story about financial data being stolen breaks (as seems to be nearly inevitable), your data won’t be among the data that is lost.

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You might have heard by now, but there was a major hacking event over the past week. The PlayStation Network, where thousands of gamers congregate to play online, has been hacked.  Yes, the ‘hackactivist’ group (that is, a group that using hacking to avenge perceived wrongs) ‘Anonymous’ hacked into the PlayStation Network, and apparently has stolen information about its users.

While Sony, the company that runs the PlayStation Network, does not believe that credit card data from its customers has been stolen, it is still cautioning its members to take appropriate cautions with their data, as “out of an abundance of caution we are advising you that your credit card number (excluding security code) and expiration date may have been obtained”.

Pretty harrowing stuff, hunh?  There’s something about identity theft that gets the blood pumping in this modern age.  Luckily, if you feel that you may have been a victim of identity theft, you don’t have to sit back and wait for something to happen before you can act.  Here are a few things you can do if you suspect you might be a victim of identity theft:

1. Put a Fraud Alert on Your Credit Reports: A fraud alert is when you alert the three credit bureaus (TransUnion, Experian, and Equifax) that your information may have been stolen, and that creditors should be concerned about requests for new sources of credit made in your name.  Having fraud alerts in place will make it harder for any would-be identity thieves to use your information to open new accounts and otherwise use your identity to make a profit.  It will last for 90 days, so if you are still afraid that your identity is at risk three months from now, you will need to renew the alert.  It’s not a sure thing, as creditors can ignore the presence of an alert and provide an identity thief with credit in your name; but it will limit the number of options that an identity thief has for getting credit in your name.  And if they do…

2. Get Copies of Your Credit Reports: Placing a fraud alert will allow you to obtain a free copy of your credit report from each of the credit bureaus.  If you order your credit reports and notice any fraudulent information, particularly any accounts or charges you don’t recognize, you’ll need to resolve them, and make sure that you check your credit report to make sure that it has been resolved.

3. Close Compromised Accounts: If you find that one or more of your accounts has been hacked (or that you have open accounts that you don’t remember opening), you’ll need to close them.  Contact the companies in question, first by phone, but also by mail (using copies, NOT originals, of documents to support your claims), and explain the situation.  Depending on the company’s specific policy, you should be able to close the accountant (and reopen it, if you so desire, with new Personal Identification Numbers and passwords) without too much trouble, although you may have to put some more effort into the process.

4. Report the identity theft to the local police and FTC: You need to notify the appropriate authorities to let them know about the identity theft incident.  By alerting the local police (or the police in the area where the theft occurred) and the Federal Trade Commission (FTC), you can let them know more about the situation and get the ball rolling on resolving the issue.

Hopefully, you won’t find yourself in a position where you need to deal with identity theft, but if you do, there are ways you can limit the damage done and regain control of your life.  Good luck!

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Picture this: A famous rapper, most famous for surviving injuries that would kill most people, starts to use Twitter, one of the most popular methods of communication to come along in recent years, to promote a small company’s stock.  It turns out that he isn’t simply spreading news about a company that he feels does good work, but rather holds millions of shares of the stock and is attempting to drive up the price in order to cash out.  And drive up the stock price he does; the ticker price more than triples after a few short tweets from our rapping friend.  The kicker is that the stock itself is not that solid of an investment, having shaky loans and losing business quarters on its books; after a short boost due to the rapper’s promotion, the stock has resumed its decline.

So, is this a story about the hazards of investing in penny stocks, my attempt to show you how inexpensive investments can be manipulated by unscrupulous ‘investors’ and boosted to undeserved highs just in time for those who are promoting them to cash out and laugh all the way to the bank?  Oh, how I wish that were case; I can’t claim to come up with story this good.  Instead, apparently 50 Cent did exactly what I just described; he bought millions of shares of H&H Imports, a small company that makes its money (or rather, loses rather prodigious amounts of money) by buying and selling women’s handbags.  He then tweeted up a storm, talking up the stock and encouraging his followers to buy it, bumping up the price of this little stock and enabling his investment to increase in value by millions of dollars.

50 Cent - Investing Genius, or Master Con Man?

Again, this is too good to be made up.  It combines one of the most common sort of frauds in existence (a pump and dump plan), a big celebrity, Twitter, and a down trodden penny stock that otherwise, probably wouldn’t be on anyone’s radar.  I don’t know that I could have come up with a better cautionary tale if I tried.

The Lessons From This Story

There are so many lessons that someone who’s spent the past two plus years studying money, personal finance, and investing can draw that it’s nearly scary.  I almost don’t know where to begin.  Let’s start with one of the most obvious lessons:

-Beware of people promoting specific stocks or other investments: The first thing you should draw from this sordid little tale is that there are frequently motives beyond enriching you that writers and other commentators can have.  If I, or anyone else for that matter, starts to pimp (to stick with the rap vernacular) a particular company or investment, you should view those recommendations with an extremely skeptical eye.  Yes, the promoter might genuinely believe in the company and think it’s a good investment, but there is a possibility that they are trying to manipulate you into playing the greater fool and paying a premium for an investment they will happily leave in your hands.  Of particular concern are…

-Watch out for those penny stocks: Penny stocks, like those issued by H&H Imports, are particularly susceptible to use by fraudsters.  Unlike the stocks of large companies like Google or Ford, penny stocks tend to be much lower in price, much more lightly traded, and have much less media coverage from legitimate sources.  If 50 Cent (or anyone else seeking to do something like this) wanted to do a pump and dump with a large company like Exxon, they’d need to put a lot more money into buying up shares, and would have a lot harder time generating enough buzz to substantially boost the trading prices.  When dealing with penny stocks, particularly penny stocks recommended by others, you’ll need to do all due research, and then some more on top of that; even legitimate penny stocks might be unwittingly used as pawns in a scam.

-Be skeptical about suggestions on social media sites: While we’re on the subject of skepticism and scams, let’s take a moment to note that social media has its own role to play in some of the latest scams.  While most of us have gotten used to the fact that our email addresses may be targeted by scammers promoting everything from specific penny stocks to generic V!@gR@, we don’t yet have the same level of concern about comments and suggestions provided through social media sites like Facebook or Twitter.  After all, we think, all the people we contact there are our friends; why would they try to deceive us?  Unfortunately, we need to keep up our vigilance; whether due to their own nefarious purposes or because they genuinely believe the promoter’s pitches, you can find your friends and followers sending along scams to you.  Remain skeptical, even about offers your own mother sends to you.

-Do your own research: Of course, it wouldn’t matter how many tips you got, or how questionable some of them are, if you make a point of doing your own research on any tip that you get.  Some preliminary research on H&H Importers could have revealed the deficiencies on their books and the other problems faced by the company.  If you opt to invest in individual companies, one of your first steps will be to learn how to interpret the financial information available to you, starting with some of the commonly used valuation ratios that professional analysts rely on for their own investment recommendations.

These are some of the major lessons I hope got reinforced by this particular incident.  There are other lessons, like ‘Don’t trust 50 Cent for stock recommendations’, but if you can keep the above suggestions in mind while reading through any investment suggestions from 50 Cent (or any other people you may be following on Twitter or other social networks), you’ll be much better off.  Good luck to all of you as you go about investing!  (Including you, 50 Cent, if you happen to read this.)

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It occurred to me as I was assembling my list of good blog articles for yesterday that several dealt with identifying or avoiding scams, either particular scams or the general concept of scams.  This makes sense; anytime is the perfect time for nefariously minded individuals to dangle the possibility of huge profits and giant returns to see who nibbles.  The only solution is constant vigilance, and understanding of how scammers work, in order to protect yourself.  Don’t fall for offers of great returns (although there are some legitimate free money offers out there, although they generally require you to do something to get the money)

In the spirit of informing the public of how to identify and avoid these types of nefarious schemes, here’s a quick primer to help you learn how to protect yourself and your money.  These are far from the only ways to reduce the possibility of finding yourself on the wrong end of the scheme, but they are a good start.  Follow these simple, largely commonsense suggestions, be careful and cautious, and you’ll be a much tougher target for scammers:

If it seems too good to be true, it probably is: If you can keep this one point in mind, you’ll save yourself an endless amount of scam related trouble.  One of the most common tactics used by scammers is promising results well beyond that of other methods, so long as you trust them and give them your money (or personal information).  If you know the sort of results you can reasonably expect to get through normal means, you’ll be able to recognize when scammers are promising more than they can possibly deliver.  Here’s some advice about ‘normal’ returns to help guide you:

-Investing: The usual figure cited for the long term return offered by a diverse large cap index (like the S&P 500) is 10% annually, including inflation.  That’s about the best you can expect from a ‘risk-free’ investment (and even that amount is far from certain in the short term, since the market is volatile).  If someone is touting an investment that returns much more than that amount, it’s either significantly riskier (as with things like forex or options) or they are flat out lying.  If they toss the word ‘Guarantee’ around as well, like ’140% annual return, GUARANTEED!’, then run, don’t walk, as far away from the investment as possible.

Taking a chance on a potential scam is an even worse gamble

-Employment: When you’ve been out of work for a while, the ads you see like ‘Make $133 an hour from home, no skills required’ start to seem more and more tempting.  Keep a few points in mind though.  First, the amount you can reasonably expect to get from a starting job is around $10 an hour, at most; anything above that amount is likely physically hard (touting freight onto and off trains), requires special  training (computer programming skills or at least a college degree), or is generally unpleasant (handling trash).  Second, while work at home jobs do exist (case in point, I’m a blogger), most require you to start your own business (again, see blogging), rather than being offered by major corporations with high starting pay (particularly to people who haven’t ever worked for them).  Finally, any place trying to fill a job half that profitable won’t need to resort to paid ads (or pieces of paper on telephone poles); a few days on Monster or CareerBuilder and they would have more applicants then they could ever handle.

-Government Money: Yes, the government does provide money to people.  No, it’s unlikely that you’re missing out on any money that information from a late night infomercial will help you to find.  Especially since the most famous proponent of ‘Free Money From the Government’ just copied the whole thing, anyway.  If you really want to find government money, check online at any number of government websites; a little searching will yield all the information you need, ready and available (and for free, to boot).

Don’t Give Away the Store: Or your personal finance information, at least.  If you can keep information about your financial institutions, social security number, and credit cards from falling into the wrong hands, you can foil a lot of scams.  Remember, the only time you should even consider providing such information is when you initiate a transaction; if you are approached by an outside source, just say no.  Speaking of which…

ALWAYS avoid wiring money to people you’ve never met: Things like Western Union or MoneyGram are a good way to transfer money to family members who are difficult to reach otherwise.  But they are untraceable and unrecoverable, making them an ideal way for scammers to separate you from your money.  Unless you need to reach people you care about and have no other means of doing so, avoid wiring money.

Recognize (and know how to avoid) the most common scams: I’ve covered many types of schemes in depth previously.  For internet users, Advanced Fee schemes are common, convincing people to put up money up front to ensure a job or a share of a windfall.  Ponzi Schemes, where proceeds from future victims provide money to fund the returns of current victims and Pyramid Schemes, which depend on an endless amount of future victims, are also common schemes.  Be aware that not all sources of investment suggestions are completely benign; some hope to Pump and Dump stocks (especially penny stocks) after convincing you to invest in them.

Don’t Be Greedy: Probably the best advice I can give to help you avoid scams of all types is not to let a lust for wealth get ahead of your common sense.  Keep your head, be rational, and ask yourself a few pertinent questions, like ‘Could a company really stay in business and compete effectively if they pay tens of thousands of dollars to someone for glorified email sending?’ or ‘If I knew the secret to doubling my money in the stock market each month, why would I share it?’  That should help to put the crazy scams you read or hear into perspective.

Now, head back out into the world, and avoid those scammers, everyone!

More Resources:

The Federal Trade Commission’s resources for Fighting ID Theft and Fraud

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“Greetings!  I am the executor of the estate of the Nigerian Prince Iam Notreal.  I am looking for someone who can help transfer the money from his estate into the United States.  In return for your help in conducting this transfer, you will receive a substantial reward, equal to 45,029,387 US dollars.  I just need a few thousand dollars to pay the accounting expenses.  Please respond with your bank account information and relevant passwords at your earliest convenience.”  Sound like a tempting offer?  Think again!

The Scheme

Chances are, you’ve encountered emails saying something similar to this during your  time online, particularly if you don’t have a very effective spam filter on your email system.  The scam is hopefully very obvious; if you give up your financial information (or send money in advance as a ‘processing fee’, or something similar), you’ll end up losing your money and never see a penny in return.  By holding out the possibility of huge returns on your ‘investment’, the scammer hopes to make you blind to the reality that the offer is a fake, and to get money or financial information out of you.

Historical Advance Fee Frauds

Spanish Prisoner: A classic advance fee fraud, dating back to the beginning of the twentieth century.  The fraudster convinces the victim that there is a rich man being held in a Spanish prison, and if some money can be provided to secure his release (in the form of bribes), then the victim will be richly rewarded when the man is released.  Of course, such a reward will never come.
Nigerian (419) Scam: The modern scam with which most of us are familiar, featuring emails sent from untraceable accounts (frequently originating in Nigeria, hence the name of the scam), trying to get money from victims.  They can either focus on getting victims to send them money voluntarily (usually through a wire transfer, making the money untraceable and unrecoverable) or on getting financial information from the victim in order to defraud them.

An Example Scheme

I decide that, after a whole week spent scamming my way to a small fortune, to use my email skills to make money.  I create an elaborate scenario, where I claim to be an employee at a bank who knows of a rich, elderly client who is about to die with nobody to inherit his vast fortune.  Now of course, I can’t simply keep all his money for myself; being an employee, I would be too suspicious.  Instead, I offer to transfer the money into the account of the email recipient, in exchange for an ‘advance fee’ to cover the legal fees of the transfer.

What the average 'Nigerian Prince' actually looks like

Realizing that there are few people who would fall for such a scheme, I decide to contact thousands, even millions of people at once.  Luckily for me, I can use the power of technology to reach them via email and other technological means to reach those people with minimal effort on my part.  So what if only one in a million people will fall for my scheme; if I contact ten or twenty million, I’ll still have a steady supply of people responding.  Once they do, I can follow up with the next part of plan, to get the people who respond to give me access to their accounts or to send me money through a wire transfer, whatever my diabolical mind can determine.  All I need is an opening.

How to Protect Yourself

Be Skeptical – I hate to be the bearer of bad news, but nobody, with the possible exception of your parents, will give you great amounts of money for nothing.  If you get any offers for free money, there’s going to be some kind of catch. There’s always a price when you receive money, such as having to do something you’d prefer not to do with your time in exchange for money (also known as ‘work’).  Don’t expect to get money for nothing, and you’ll reduce your risk of being scammed significantly.

Take Care When Sending Money to Strangers – You shouldn’t send money to people who try to contact you online.  If you do need to send money to someone online, for a legitimate item sold on an auction site, for example, stick to methods that offer you some protection, such as PayPal or other online payment services, rather than using wire transfers.  There are legitimate sources of goods and services online, but avoiding scams requires diligence and care.

Don’t Give Out Financial Information – The best way to protect yourself is to ensure that nobody other than you has access to your financial info.  If you do get embroiled in a scam, sending money via a wire transfer or other method will be bad, but at least your losses will be limited to what you actually send; the scammers won’t get any more money from you (at least, as long as you don’t take their comments about ‘needing more money for additional fees’ seriously).  While losing money is never fun, having your life savings depleted because a scammer got into your accounts is even worse.

Follow these steps, and you’ll find yourself much safer from advanced fee frauds.  Just don’t worry the next time someone from Nigeria tries to give you some money, and delete the email right off the bat.

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If you spend much time reading financial information online, you’ve probably noticed that many otherwise reputable sites have sidebars displaying advertisements touting penny stocks, with a come on like ’3 penny stocks about to soar.’  In fact, you probably see several of them on my sidebar, now that I’ve used the phrase ‘penny stocks’ in this article.  The problem with penny stocks is that, by definition, they are associated with lightly traded companies who have only a small net capitalization, making them subject to any number of scams.  Which brings us to today’s topic…

The Scheme

The basic pump and dump scam has three main parts.  First, the schemers buy up a great deal of a stock, preferably one with a small price, allowing them to purchase a lot of shares.   Second, the schemers attempt to build a buzz for the stock, touting it on message boards and other resources, hoping to pump up the perceived value (the ‘pump’ part of the scheme).  This is why penny stocks and others with few outstanding shares are favored; few scammers possess the resources needed to move the price of large-cap stocks, given the high trade volumes, large numbers of shares and many sources of other information.

First Comes the Pump...

Finally, after the price of the stock has risen significantly, the scammers sell their shares, netting a large profit and leaving the victims holding greatly overpriced shares (the ‘dump’ step of the scheme).  The overall result is schemers who profit greatly, and investors who lose money on stocks they never should have purchased.

A Historic Pump and Dump Scheme

Jonathon Lebed: An example of one teenager doing something other than loitering, he made a small fortune buying penny stocks, touting them on message boards, and then selling them.  The SEC caught wind of him and prosecuted him (the first time they ever prosecuted a minor), eventually settling out of court and allowing Johnathon to keep more than a half a million dollars in profit.  Not bad for someone who couldn’t legally drive at the time.

An Example Pump and Dump Scheme

Once again, I decide I can make a much higher profit by running a stock scheme than I can by blogging, and this time (luckily for our example) I decide to try a pump and dump scheme.  I search through the ranks of penny stocks, eventually settling on one (or a small number) that are selling for a very small price, are lightly traded, and sound vaguely intriguing.  I purchase  a large number of shares of each company, after I do some homework to ensure there isn’t much information to be found on any of them.

After I buy up a large amount of these stocks, it’s time to make them appealing to other investors.  There are any number of ways to do this; creating a fake review of the company, making a video that calls it the ‘pick of the century’ or even writing posts recommending my own stocks on a financial blog.  To ensure that people encounter my ‘pumps’, all I need is some clever and provocative ads, like the ones mentioned at the start of this article, placed on sites that gather a lot of traffic.  Before long, I’ve got thousands of people reading my ‘expert’ views on these crummy stocks, and with few, if any, sources contradicting me, more than a few of them will take me at my word and start bidding up the stock price in their rush to buy.

...Then Comes The Dump

Depending on how greedy I am (as well as how much I think my touts will bump up the price of the stock before people get wise to my scheme), I can start selling after the stock prices double, or triple, or increase ten-fold, netting me massive profits.  I will more than cover the expense of the advertising and other costs associated with setting up the scheme, leaving the people I conned into buying those securities holding the bag, with stocks that have no justifiable reason for their high valuation.

How to Protect Yourself

Avoid Penny Stocks – Frankly, there’s few reasons to ever consider penny stocks.  There are plenty of opportunities in small cap stocks that are small enough to grow rapidly, but large enough that they can’t be readily manipulated by unscrupulous profiteers.  Save yourself a great deal of time and aggravation and avoid penny stocks (and other questionable investments, while we’re on the subject).

Be Skeptical About Investment Advice – Hopefully, you already take most investment claims and suggestions with a grain of salt; not all advice is appropriate for everyone, after all.  But especially when taking advice from online sources (which do not require fact-checking or even knowledge of the creator’s true identity), you have to stop and ask yourself what the writer has to gain from you following their advice.  Most people, if they have a stock they genuinely believe will increase many times its current price in a short time, will not be willing to share that stock’s identity with you; if they are, you have to ask yourself, why?

Do Your Own Research – Alright, so you’ve just read about a stock that sounds like a fantastic investment.  Before you go and buy based on a single recommendation, it’s time to do plenty of research.  There should be plenty of resources that detail the stock, providing you with material to support your choice, or perhaps to change it.  If you can’t find research on the stock (preferably from large, well-established firms and not just blogs or other ‘anonymous’ sources), then do yourself a favor and don’t buy it.

Follow these simple steps, and you should have few problems with ‘advisers’ trying to pump up their stocks and then dump them on you.

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All this week, we’re looking into some of the most popular scams used by ne’er do wells to take your money.  Today’s subject is especially diabolical, as it attempts to convince you to give up your money voluntarily, and then convince others to do the same thing.  These schemes also lose points for tarnishing the name of one of the Wonders of the Ancient World.  Yes, this episode looks at pyramid schemes.

The Scheme

The basic promise of a pyramid scheme is simple; by making a one-time payment to someone higher on the pyramid, the investor will get a place in line and will, as more people join, make many times their initial deposit back.  All they need to do is recruit more people to the scheme (or, as it will likely be called, the ‘investment opportunity’) and they and all the other investors can make many times your initial investment, all by just getting other people to join the investment.  It’s a simple way to become rich, right?

Sadly, these aren't the pyramids we're discussing

As with many quick and easy ways to become rich you’ll hear about, there are some issues.  If you get in the scheme near the start, you can profit (at least, until the authorities find out about your involvement), but the bulk of the participants end up paying money for their involvement with no return.  The only way to keep the profits flowing is to find an endless series of new participants.  Since the human population is finite (and squirrels tend not to have money to invest), eventually the whole scheme will fall apart, with the latest recruits unable to find enough new participants to recuperate their investments.

An Example Scheme

Let’s say that I decide to start a pyramid scheme.  (As always, I’m a diabolical character in these examples.)  I recruit three people, offering to tell them how to make a huge profit with minimal work, after they pay a fee of $1000.  I pocket $3000 and walk off laughing, after telling these first three how to recruit others to our scheme.  They each go out, recruiting three more people, who in turn recruit three more people.  The scheme works well for a while; everyone in the first few levels gets $3000 after their $1000 ‘investment’, a 200% return on their money.

The problem is that the number of people required increases exponentially.  After five rounds of each individual participant needing to find three new people to join, there will be 81 people needed; high, but far from impossible.  More than 19,000 people are needed after ten rounds, and nearly 5 million people (the population of several small states) after fifteen rounds; as you can see, the number of needed people quickly becomes very high.  After a mere twenty-two rounds, 10 billion people are needed to maintain the scheme, an impossible level of people given the current world population.  The people in the last round of the scheme (which will likely occur way before it requires the whole world population to participate) will get stiffed, meaning around 75% of the pyramid scheme participants will lose their money no matter what.

How to Protect Yourself

Understand How You Will Make Money – Understand how your investments will work BEFORE you put any money into them.  If all or the vast majority of your profits come from recruiting other people to the business rather than selling a product or investing your money, you’re likely looking at a pyramid scheme.  Proceed with caution and behave accordingly.

Be Wary of Network Marketing – Network Marketing and Multi-Level Marketing, usually through companies like Amway and Tupperware, tends to get a bad name, as well as being associated with pyramid schemes.  There are some disturbing similarities, the profits from recruiting new people being a big one, but some of these can represent legitimate opportunities.  (My aunt swears by Avon, for example.)  Just be aware that there can be a fine line between the legitimate opportunities and the scams, and do plenty of research before committing any money to anything.

Be Skeptical – Hopefully, you’re experienced enough in life to realize that getting massive returns on your money in a short period of time with almost no work is tough, if not completely impossible.  Don’t worry that you’re missing a great opportunity by not joining in on a touted investment ‘opportunity’; there are enough legitimate, good opportunities available without trying to shoot the moon.

That’s all there really is on pyramid schemes; don’t be suckered the next time your cousin calls you, telling you about an amazing investment opportunity, if you just help him find five more investors, and you’ll be alright.  Let him know what you’ve just learned, and hopefully he hasn’t put up his money yet.

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All this week, I’m going to be taking a closer look at many of the tricks and techniques used by men and women with questionable ethics in order to take money from innocent people, whose ranks include my readers (I hope…).  In order to help you fight against these charlatans, we’re going to look closer at some of the most popular techniques used to separate you from your money.  First on the agenda is the Ponzi scheme, which has been getting a lot of attention due to recent purveyors of this rather old scheme.

The Scheme

A basic Ponzi scheme works like this: investors are convinced to invest with the schemer, usually as a result of clever marketing and promises of unrealistic investment returns (doubling your money, risk-free, in ninety days, for example) in an unorthodox investment arrangement.  A small number of investors form the first group, putting their money into the investment.  They receive the promised returns, paid from their own deposited money, and word spreads of the lucrative opportunity to become rich offered in the schemer’s investment.  A steady influx of cash ensures that the payouts continue, drawing in an even greater amount of investment money, forming an endless circle.  Endless, that is, until the scheme collapses under its own weight, unable to get enough new money coming in to cover the payouts or having the funds depleted by withdrawals.

Historic Ponzi Schemes

William Miller – Offering a ten percent weekly return, he earned the nickname ’520 percent’ and a ten year prison sentence, years before Ponzi came on the scene.  (Which means all you Millers out there can breath a bit easier; if William’s scheme had been more famous, you might be reading an article on ‘Miller Schemes’ right now.)
Charles Ponzi – The man who lent his name to this whole class of schemes, he claimed to increase your money by 50% within 45 days or double it in 90, all by buying foreign stamps and reselling them in the US.  He ended up in prison for much of his adult life, as a result of this and other wrong-doing.
Bernard Maddow – The most famous recent example of a Ponzi scheme, he ran an investment fund that ended up being busted during the fall of 2008, leading to criminal charges against him at the end of 2008.  As a result of the huge size of this fraud (and the fact that his last name is pronounced ‘Made Off’, lending itself nicely to ‘made off with all my money’ comments) ,he is one of the most talked about Ponzi schemers.

An Example Scheme

Let’s say I decide to run a Ponzi scheme.  I advertise that for a mere $10,000 minimum deposit, I can provide you a ten percent return each week (repeating Miller’s claim, basically) from a scheme involving hedging pork bellies with soy beans, or whatever scheme I think will catch people’s attention.  I get ten initial investors, and at the end of the week, I dutifully return 10% of their money, which I call the ‘investment proceeds’.  In reality, all I’ve done is take their money and give part of it back to them, but make them think that the entirety of their cash is still being invested.

With the fame I derive from these first ‘investments’, suddenly there are even more investors lining up to give me money.  The problem is, eventually the whole thing catches up on me.  Even if I get ten new investors with each week, after ten weeks, they will think I’ve got their money, even if after ten weeks, I only have half as much cash as I’ve led them to believe, or after nineteen weeks, when I run out of investor money to pay everyone (sooner, if I take part of the incoming money for my own profits):

Ponzi At Work

As you can see, the real value of money I have in my ‘fund’ is always less than the amount people have added to my scheme, and eventually, the difference becomes so large that the fund is essentially bankrupt.  The only solution is to get the number of people who donated each week to increase; but even in that case, eventually the funds will run out, and everyone will realize I don’t have their money held safe, steadily making profits.

How to Protect Yourself

Become Financially Educated – The best defense against Ponzi schemes, as well as most other types of scams in the investment world, is to have at least a basic financial understanding.  If you learn about stocks, bonds, mutual funds and other investments, and have an understanding of the amount of return you can get from them, you’ll be able to look at the pitches of a Ponzi scheme and realize how absurd they sound.  Which brings us to our next tip to protect yourself…

Maintain a Healthy Skepticism - It’s easy to look at some of the promises offered by Ponzi schemes (1o% weekly returns, doubling your money in ninety days, etc.) and get caught up in emotion, investing your money to chase wealth.  Instead, consider such dramatic claims as enticements, and do your own careful research.  If it doesn’t seem like the specifc advice you’ve encountered on the types of investments touted by a sales person is right, don’t make a purchase.  That’sa ll there is to it.

Diversify Your Portfolio – While this is not advice specific for dodging Ponzi schemes, per se, but  it’s an important part of any financially responsible family.  If you have all your money in one place, it’s easier for your money to disappear should the investment turn out to be part of a Ponzi scheme.  No matter what returns are being offered, be sure to split up your money, to keep one bad egg from crushing your nest egg.

That’s all for Ponzi schemes.  Turn in next time, same financial time, same financial station!

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