12.1.4 Investment fraud

Pyramid sales

Someone recruits you to invest in a business or to buy merchandise to sell. You are expected to recruit new members. The people at the top of the pyramid collect the money that comes in, and each layer earns money from the layers below. So to succeed, each layer has to bring more people into the pyramid scheme, as this illustration shows.

Multi-level marketing in itself is not illegal. It becomes illegal when income comes primarily from bringing in new participants rather than from the products they sell. It can also be a scam if the product has no value or very little value.

Ponzi scheme

In a Ponzi scheme, you may be recruited through ads that promise big money with little risk. And in fact, if you get into the scheme early, you may receive high returns. Here's the catch: The returns are paid from your own money, and from the money that new investors contribute. The investment may not even exist. After a while, new people stop joining. That's when the promoters vanish, taking your money with them.

Pyramid sales and Ponzi schemes are similar, but with one key difference: in a pyramid scheme, you know it makes money by getting more people to join. In a Ponzi scheme, you are a victim—the organizers hide the fact that the real source of income is new members.

Boiler room

A team of scam artists set up a makeshift office, called a "boiler room." You receive an unsolicited phone call to buy shares in a company that is about to be listed on a major stock exchange. The caller says that once the company goes public, the value of its shares will skyrocket. However, the company doesn't exist. By the time you realize it's a scam, the fraud artist will have disappeared, and you'll likely never see your money again.

Pump and dump

You get a promotion for an incredible stock deal. What you don't know is that the people promoting the stock own a large amount of it. You buy in, thereby helping to push up its value. As more investors buy shares, the value skyrockets. Once the price hits a peak, the fraudsters sell their shares and the value of the stock plummets. You're left holding worthless shares.

Registered retirement savings plan (RRSP) fraud

"Withdraw money from your RRSP without paying taxes!" Fraudsters propose that you sell investments you hold in your retirement savings plan and use the money to purchase shares of an "RRSP-eligible company." After you make the purchase, the company folds. And you do have to pay taxes on the amounts withdrawn from your RRSP. Contrary to what you were told, the company in which you invested was not only a fraud, it was not RRSP–eligible.

Foreign exchange (forex) market scam

A legitimate-looking ad offers you an exciting opportunity to invest your money on the foreign exchange (forex) market. Usually, your money is not invested in anything, but is simply stolen by the fraudster. Even if your money is invested, you may not have been told that the investment is very risky. Again, you're likely to lose some or all of your money.

For more information

To learn more about investment fraud, see the Investing module. Also visit the Canadian Securities Administrators website.