Financial Scams You Need To Avoid

By Lighthouse | June 6, 2023 | 10 Min read

A Real-Life Cautionary Tale

Meet ‘Bob’ (name changed for privacy), a hard-working Kiwi dad who lost a staggering $700,000 in an investment scam. His ordeal began with a cold call from a so-called representative of Synergy Capital Asset Management based in Hong Kong. The caller proposed an investment in pre-IPO shares, which are shares offered before a company goes public. Bob was asked for an initial investment of $8,000 to “establish trust”.

“I didn’t bother myself too much about it. I thought, if I lose $8000, well, I’ve learnt my lesson,” Bob recalls. However, a series of follow-up calls from a smooth talker with a London accent persuaded Bob that he was dealing with a legitimate and knowledgeable trader.

Despite his bank’s warnings about potential scams and an unsuccessful attempt to transfer $55,000, Bob was reassured by the scammer, ‘Michael’, who claimed it was a common issue due to banks trying to control the flow of money offshore. Despite some red flags that didn’t sit right with him, Bob continued to send money for what he believed was the purchase of more shares, buoyed by glowing reports of the profits he was supposedly making.

Bob’s daughter, Kate, was instrumental in identifying the scam. “When a family member is being scammed, you keep hoping that it’s not true,” says Kate, “but there were just too many red flags to be convinced otherwise.” The biggest red flag was hidden in plain sight: the initials of Synergy Capital Asset Management spelled out S-C-A-M. By the time this was realized, Bob had already sent around $700,000 to the scammers.

Bob’s story serves as a potent reminder of the importance of vigilance and thorough due diligence when it comes to investments. It underscores the urgency to shed light on the current landscape of financial scams in NZ and the need for effective preventive measures.

Check out the full article on the FMA website here.

Common Financial Scams

Financial scams are intricate and diverse, and it is important to recognise the telltale signs. Here’s a look at some common scams that continue to plague New Zealanders:

Boiler Room Scams

These involve scammers setting up temporary offices or ‘boiler rooms’ from where they cold-call potential victims, offering non-existent, worthless or overpriced investments. The offerings could range from shares, foreign exchange (FX), cryptocurrencies, binary options, to even sports investment schemes. Tactics like fake surveys, social media ads, hoax calls, celebrity endorsements, polished websites and glossy brochures are often used to gain the victim’s trust. When victims attempt to retrieve their money, the scammers either make excuses, refuse or simply stop responding.

Ponzi Schemes

A Ponzi scheme operates on a simple principle: robbing Peter to pay Paul. Scammers promise high returns with little risk to investors and use the money invested by new investors to pay previous investors. The scheme eventually falls apart when they fail to secure funds from new investors.

Share Scams

Scammers offer investments in shares that they have no intention of buying on the victim’s behalf or in companies that either don’t exist or aren’t worth the price being paid. They may even offer to buy shares you already own at an inflated price, provided you pay a fee upfront.

Recovery Scams

Recovery scams target those who have already fallen victim to a scam. The scammers, often pretending to be law enforcement or government officials, promise to recover the lost funds for a fee. This is an example of an ‘advance fee’ scam, where upfront payment is demanded before any service is rendered.

Romance-Investment Hybrid Scams

Romance-Investment Hybrid Scams combine elements of romance and investment scams, exploiting emotional bonds to swindle victims financially. The scam often begins on dating platforms or social media, where the fraudster forms a romantic relationship with the victim. Once trust is established, they introduce fake investment opportunities promising high returns. Lured by the romantic connection and monetary gain, victims invest, often losing significant funds. It’s important to slow down, seek professional financial advice, check the identity of online acquaintances, and never share personal or financial information without ensuring the recipient’s identity and credibility.

Pump and Dump Scams

A “Pump and Dump” scam is a type of financial fraud involving the artificial inflation of a stock’s price, typically of a small, less-known company. The fraudsters, who hold a significant amount of this stock, start spreading false, positive news about the company, driving up demand and thus, the share price – this is the “pump” phase. As the price reaches a high point, the fraudsters sell off their shares at this inflated price – the “dump” phase. When they stop promoting the stock and other investors begin to sell off their shares, the price plummets, leading to substantial losses for those who bought during the “pump” phase.

Protecting Yourself Against Financial Scams

Despite the alarming increase in scams, individuals can adopt certain measures to protect themselves:

  • Be Skeptical: If an offer seems too good to be true, it probably is. Always research before committing financially.
  • Secure Your Personal Information: Do not share your personal or financial details unless you’re sure of the recipient’s identity and trustworthiness.
  • Keep Software Updated: Regularly update your computer’s security software for added protection.
  • Use Secure Payment Methods: Use secure payment methods when shopping online and avoid direct money transfers to unknown individuals.
  • Ignore Uninvited Investment Offers: Unsolicited investment opportunities, especially from unfamiliar sources, are often red flags for potential scams.
  • Avoid Offshore, Online Businesses: Scammers often operate from remote locations to avoid detection. Be wary of investing through businesses that operate solely online and are based offshore.
  • Use a Licensed or Registered Financial Service Provider: Ensure the organization or individual you’re dealing with is registered with or licensed by a regulatory body. In New Zealand, this would be the Financial Markets Authority (FMA).
  • Secure Your Personal Information: Do not provide your personal or financial information unless you’re certain of the recipient’s identity and trustworthiness.
  • Consult Trusted Parties: Check in with advisers, family, or friends before making significant financial decisions. Their external perspective might spot potential risks that you may have overlooked.
  • Check the FMA Website: The FMA website regularly publishes warnings and alerts about potential scams and fraudulent activities. It’s a good habit to check this resource regularly.

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