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We've probably all heard of the Ponzi Scheme, made famous first by Charles Ponzi and most recently by Bernie Madoff:

In March 2009, Madoff pleaded guilty to 11 felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the 1980s, and the investment operation may never have been legitimate. The amount missing from client accounts, including fabricated gains, was almost $65 billion. (Wikipedia)

My question is: What are the most common types of financial scams to look out for, as an individual investor? What warning signs are there? How to defend oneself?

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3 Answers 3

Affinity fraud. You see, Madoff really didn't have to sell himself, people recommended him to their friends. In a similar way, it's easy once a scammer reels in one sucker to keep him on the hook long enough to get 10 friends to invest as well. I've written about Mortgage Acceleration scams, and the common thread is that they are first sold to friends, relatives, neighbors. People tell their fellow church goer about it and pretty soon people's belief just takes over as they want it to work.

How can I get scammed buying S&P ETFs through Schwab? Easy, I can't.

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Welcome! +1 for pointing out affinity fraud. A good reference I found about affinity fraud is investright.org/affinfraud.aspx –  Chris W. Rea Jan 13 '10 at 4:07
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If an offer "is only valid right now" and "if you don't act immediately, it will expire" that is almost always a scam.

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In the case of an investment strategy, if you don't retain custodianship over your funds, or at least determine who is the custodian, then walk away. You should be able to get accurate account statements from a trustworthy third party at all times.

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