How Not To Be Scammed

Never let your guard down

Sometimes, it feels like it’s you against the world when it comes to protecting your assets. You face an unending assault of emails, texts, phone calls, and can’t-miss investment opportunities, any of which could be a scammer.

I’ve been fascinated by these hustles since watching Three Card Monte operators on the streets on New York in the 1980s. Their hand mechanics were brilliant and showed how easy it is to fool any of us:

But that was a $20 hustle. Now, let’s look at some ways bad actors try to separate you from all your money and how you can protect yourself.

1. Ponzi Schemes

What are they?

The short explanation is that older investors receive distributions funded by newer investors joining in. It can’t last forever but as long as the scammer is recruiting new money, it sustains itself. Eventually, the new money dries up, the scheme collapses, the victims lose most or all of their investment, and the hustler goes to jail.

Madoff and the eponymous Ponzi himself are the most famous but these have been around for a long time, probably because they can be so effective.

They work because they offer attractive investment returns with little risk. (Who doesn’t want that?) The investment strategy is typically secretive, seemingly complex, and poorly explained by the always confident and charismatic promoter.

One unique aspect of these scams is that the victims typically have some loose affiliation (e.g., ethnicity, country club membership, alumni network, etc.) making it easy to spread through unwitting validators.

How can you protect yourself?

The first tell is that the returns are too good and too consistent. However, there are other clues such as the investment strategy is unclear, there’s no independent audit of the firm or registration of the investment offering, and there may be roadblocks or delays to get distributions. But, all of this is easily overlooked as you likely heard about it from a trusted friend or family.

The first rule of investment scams is that there are no free lunches. If it seems too good to be true, it probably is, and at a minimum, be skeptical. Before investing, ask for an audit report, prospectus, or other offering documents. Research the principal promoter which is easy to do in this age of Google and LinkedIn. Also, start small and proceed slowly.

Lastly, check in with someone before investing. That’s not as easy as it sounds as the beauty of a Ponzi scheme is that you often hear about the opportunity from a trusted source (who’s also being scammed but doesn’t yet know it).

2. Authority Swindles

What are they?

I made up this term and it refers to being contacted by a trusted and legitimate authority such as the IRS, FBI, Amazon, your bank, student loan servicer, etc. The list is limited only by the creativity of the scammer.

They contact you to resolve some outstanding financial issue that you didn’t know you had such as a loan or tax delinquency, insurance claim, lawsuit, or bizarrely, a financial swindle against you that they’ve preemptively spotted. There’s always a sense of urgency combined with personal doom if it’s not resolved immediately.

When executed well, they get an immediate emotional response from you by preying on your vulnerability and fear of [_______]. Fill in the blank with: losing your money, your home, your car, going to jail, being sued, being embarrassed, etc. These are clever because they don’t appeal to your greed; it’s all about triggering a panicked fear response from you.

Here’s a recent example recounted in Barron’s:

The client… a 75-year-old widow in Florida, was targeted by scammers posing as a technical support staffer, a bank staffer, and a government official who told her that her identity had been stolen and involved with child pornography activity, according to [her] statement of claim submitted to the arbitration panel, which was convened by brokerage industry self-regulator Finra.

The scammers told [her] that she was facing a yearslong asset freeze and that she needed to convert her funds into cash and gold bars that would be handled by couriers and cryptocurrency that would be held in a U.S. Treasury account under a new Social Security number.

[She] made two large withdrawals totaling nearly $2.1 million from her Morgan Stanley accounts… less than two weeks apart, totaling roughly one-third of her assets held with the firm.

How can you protect yourself?

On the face of it, these swindles are so absurd as to be laughable. Does the FBI, US Marshall Service, Amazon, etc. ever call you up with some proposition where you need to urgently and secretly come up with a pile of money — usually cash or a pre-paid debit card to be handed over to some guy in an SUV — to resolve some open issue that you never knew you had? I don’t think so. As far as I know, the IRS doesn’t settle tax delinquencies by demanding cash or gold bars on a street corner in Brooklyn.

However, it’s not that simple because these swindlers are clever and trigger you so you’re not thinking clearly. In this case, first slow down and take a breath. Next, involve some trusted friend or family, especially when the scammer is demanding secrecy. That alone may end the swindle as it’s easier to recognize when you’re not the one being triggered and just by delaying, they may conclude you’re not such an easy mark and move on to the next one.

3. Emotional Swindles aka Pig Butchering

What are they?

These are similar to the authority swindles but instead of preying on your fear, they target other emotions such as your loneliness, good nature, or generous spirit. More graphically, these scams are known as pig butchering.

In these scams, a charity, someone you may be dating online (but surely haven’t met in person), or some other indirect connection (e.g., a LinkedIn contact) communicates with you about a no-lose investment opportunity or a tragic tale for which they need some financial help. Again, the possibilities are limited only by the creativity of the schemer. They tug at your heart and eventually extract money from you, often multiple times. There’s no urgency in this scam as they need time to build a trusting and ongoing relationship with you.

How can you protect yourself?

Unlike the prior ones, these are not so absurd and can easily have a sense of verisimilitude about them. However, the same advice applies — slow down, take a breath, and check in with a trusted contact. And then, do some research on where this money is supposedly going or what its purpose is. If you’re too slow and deliberate, the schemer may just move on to someone else.

4. Family Swindles

What are they?

These are when a family member is in grave danger. “Is there another kind?” Jack Nicholson asks in the famous courtroom scene from A Few Good Men:

It could be that your grandchild calls (whose voice you don’t quite recognize) and needs bail money or he’s going to spend the weekend in the Riker’s Island jail or your mom has been kidnapped and is screaming in agony in the background. Again, endless possibilities but they all demand immediate payment to avoid some horrible fate. These prey on a different emotion — concern for your loved one — and the knowledge that you’d do anything to save them.

How can you protect yourself?

It’s a similar answer. These are both absurd and possible but they immediately launch you into panic mode as it’s your loved one in peril and time is of the essence. Again, they’re very clever.

The response is similar — slow down, take a breath, and check in with a trusted contact. Next, if it’s your mom who’s kidnapped, or your grandson who’s arrested, call them — they’ll probably answer!

5. Cyber-Thefts

What are they?

There are a nearly infinite variations of these cyber-crimes but the better known ones are:

• phishing — convincing you to respond to electronic messages and reveal sensitive information that allows the attacker to get into your accounts

• ransomware — taking over your computer and demanding ransom to recover access to your files

• malware — unwittingly downloading software on to your device that gives the attacker access to your files and/or login credentials

• identity theft — stealing your identifying information and taking out loans or credit cards in your name

You can learn more here and here.

How can you protect yourself?

It’s hard to spot these (until it’s too late) so your focus should be on insulating yourself from attacks. It’s the usual advice that we’ve all heard since the early days of the internet tubes:

• don’t click on any links or download any suspicious file attachments from untrusted email or text sources

• don’t reuse passwords

• use a password manager other than a yellow stickie on the side of your monitor

• lock your electronics and require a password to get access each time — even better, use biometric security for your devices

• don’t use public wifi networks for any sensitive websites

• do online banking only at home

• keep your operating system updated

• use anti-virus software

Lastly, how else can you generally protect your finances from any scams?

No system is fail safe and you’re always trading off convenience and security but here are some suggestions:

• protect your most important credentials — email and financial institutions — extra carefully with unique passwords

• simplify your accounts so you can more easily monitor them — merge multiple bank and investment accounts when possible so you have fewer accounts

• receive notifications from your financial accounts for all large transactions

• lock down any financial accounts from which you don’t plan on making any withdrawals — e.g., if you know you’re not going to take any money from your IRA for the next 20 years, instruct your financial firm to bar all distributions unless you personally override that

• assign a trusted contact for your financial accounts

• be wary of all investment pitches, especially when they’re slick, high pressure, or too complicated to understand

Finally, here’s the radical leftist Paul Krugman’s perspective on getting scammed by financial institutions:

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Springtime for Scammers

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Summary

As I said at the top, it’s you against the world and you need to be on guard. Don’t spend all your waking hours angsting about how you’re going to be scammed today but also don’t keep your head up in the clouds or down in the sand.

It would be nice to assume positive intent but when it comes to your life savings, don’t trust and always verify. That should keep you out of grave danger.