Never has investment fraud been more prevalent than it is now. In 2022, Americans lost more money to investment fraud than any other type of fraud, according to a new study by investment fraud law firm Carlson Law.
The firm analyzed data from the FBI and Federal Trade Commission to compile a report on the current state of investment fraud in the U.S. The company found that a record $3.82 billion was lost to investment fraud last year, up from $1.6 billion in 2021 — a 128 percent increase.
According to the company, the bulk of last year’s investment fraud was tied to cryptocurrency-related scams, which was due in large part to the collapse of FTX and other high-profile crypto exchanges. A record $2.57 billion was lost to cryptocurrency investment scams last year, according to the report.
Other common types of scams were real estate scams where fraudsters created “lucrative” real estate investment opportunities that did not actually exist, Ponzi schemes that promised high returns on investment, and pump and dump schemes. Advancements in technology also took center stage with many scams using artificial intelligence such as voice cloning and deep fakes.
Californians lost the most money on a state-by-state basis, with $870 million lost due to overall fraud in 2022. California also had the second-highest average loss per victim at $176,463. However, it only ranked fifth for the highest rate of investment fraud per capita.
Washington D.C. ranked the highest in terms of investment fraud per capita with 26 victim complaints filed per 100,000 residents last year. Maryland, a nearby connected state, ranked second in investment fraud with 17.4 complaints per 100,000 residents. New York and Nevada were also in the top five. Conversely, Ohio, the seventh most populous state, ranked 40th for investment fraud, while Alabama and Wisconsin ranked 43rd and 44th, respectively, while also ranking in the top 25 for population.
New Hampshire ranked as the No. 1 state in terms of the scale of money lost per victim with the average victim losing $204,447. California was second, followed by Nebraska, Wyoming, and Kansas. Despite D.C. ranking as the number one location for investment fraud per capita, the frauds tended to be smaller scale, with the average victim losing just $37,311.
The Securities and Exchange Commission has expressed concern about what it sees as unregulated securities and recently proposed changes to digital currency custody rules to better protect clients of registered investment advisors. Some experts say this could potentially prevent investors from seeking advice, a concern that was cited by one SEC commissioner who dissented in the recent proposal.
The Certified Financial Planner Board of Standards also released new guidelines at the end of last year that specifically targeted cryptocurrency. The CFP Board recommended that advisors act with caution when advising on cryptocurrency, as these investments “present significant risks.”
Despite the increase in overall investment fraud, the number of claims against financial advisors that included allegations of fraud fell from 744 in 2021 to 699 in 2022, according to data released by the Financial Industry Regulatory Authority and included in the report.
Advisors can also play an important role in helping prevent fraud against their clients.
Mona Manahi, managing director and head of CFO Services for Geller Advisors, a $5 billion RIA, said that she has seen a shift away from criminals targeting financial institutions and large corporations and instead going after wealthy individuals.
“Typically, those companies have implemented a higher security infrastructure and improved their cybersecurity and have educated their employees to not fall victim to those threats and crimes. Criminals consider individuals much softer targets because they don’t have similar security infrastructure,” Manahi said.
A 2020 study by the Justice Department and Experian found that the affluent were 43 percent more likely to experience identity theft. A 2020 report by wealth management firm Northern Trust found that 98 percent of 78 global family offices surveyed said they had experienced at least one cyberattack.
But there are steps advisors can and should take.
Education, both of staff and the client, is a key component to prevention, said Geller Advisors’ CIO Rob Wedeking.
“Families are getting pitched all kinds of things all the time. And I think in the area where folks do poorly, it’s because they don’t have their advisor look at it or they don’t have an advisor giving them a professional view as to what the opportunity might be,” Wedeking said. “There’s been many times where we’ve looked at it and said, ‘Hey, this just doesn’t pass muster.’ Not even to the point that it’s fraud. You want to kind of look and ask ‘Are these investments worth it on the face?’’
Wedeking believes that most fraud is preventable. Advisors should be hypervigilant and aware of the potential for phishing and other cyber attacks, he said. Advisors should also be doing due diligence on potential investment opportunities and be in communication with their clients. Things like two-factor authentication, secure portals, password-protected documents, and regular reporting of financial results are also essential, according to Manahi.
“Is this a valid vendor? Can you get the W-9 and the tax ID number? Can you contact the firm that’s requesting this? Is there a valid invoice? Some of those routine controls are what we do to prevent it and to detect it,” Manahi said. “And if something bad does happen — let’s say their credit card number was stolen or identity theft in some way. We are their first phone call. We can deploy very quickly the steps needed to shut down the accounts, freeze things so that there’s no continued fraud, and then replace cards — if it’s a stolen card — report to the credit agencies and just get them back on track.”
Manahi also stresses that advisors need to maintain awareness of what is going on in their clients’ lives. “Be aware of those times of increased vulnerability, for example, the three Ds: death, divorce, and significant amount of debt. Whenever there’s transition activity in those areas, or whenever there’s a big generational wealth transfer from matriarch or patriarch to their second generation. There are things that can happen that make them have some blind spots or areas to be more aware.”
