Forex Fraud
It’s
an old story. A new market or investment opportunity opens up. A few
people make excellent returns in a short amount of time and
advertise the investment to their friends. Soon there is a rush of
inexperienced, unsophisticated investors, hoping to make big money
without any risk and little knowledge. This only attracts an equal
number of frauds and scammers who are more than happy to help people
part with their money. In the end, a large crowd of frustrated
people exit, vowing never to invest again.
However, fraud has also plagued the market
during the same period. In 2008, the
CFTC, the U.S.
commission responsible for monitoring the market, set up a special
task force to focus on forex fraud. They found that many dealers
promised large returns with an initial investment of $5,000. In a
number of cases, the money never even entered the market, but was
simply stolen. In other cases, the fraud is more sophisticated, as
“trading desks” charge expensive fees or purposefully insure that
their customers lose—to the benefit of the brokerage. According to
the Wall Street Journal,
the average trader loses about $15,000, and one CEO of a forex
company said, “If 15% of day traders are profitable, I’d be
surprised."
Consider one example of a
forex scam. In 1998,
Russell Cline founded Orion international—a brokerage
specializing in forex trading. They claimed to have
sophisticated trading techniques with returns of 60% to 200% and
minimal risk. But the brokerage was a complete fraud. After four
years, Cline admitted to his clients that 97% of the $27 million
that had been invested was gone. He blamed unlucky trading and
minor errors for the loss, but in reality, the money was spent
on personal jets, luxury cars, real estate purchases, boats, and
another $12,000 on pornography. Cline was sentenced to only 8
years in prison, and investors received a tiny amount of their
money back.
This pattern may have been repeated many
times in the past, but that didn’t stop many people from falling into
the same trap when online forex investing became widely available in
the late 90’s. The retail forex market has grown explosively, as
trading platforms have made the market increasingly accessible to
consumers.
Russel Cline illustrates a principle that
applies to all forex, as well as other kinds of investments. If an
opportunity sounds too good to be true, it probably is. Forex trading
is a sophisticated and challenging type of investment, and traders can
only profit if they are smarter than the rest of the market.
Another principle illustrated by this
example, is that just because a company is under official regulatory
agencies, it isn’t guaranteed to be safe or even legitimate. Every
trader who considers entering the market should remember that his
account is not insured under any government agency, and if the
brokerage or investment fund proves to be a fraud, the money is simply
gone.
How then, do you recognize a fraud before
losing? First, notice the history of the company. Most frauds have
been launched in the past few years, but a company with longevity has
a better chance of being legitimate. Also, pay attention to how your
brokerage or fund actually works and makes money. If it doesn’t make
sense, you should be asking hard questions. Most importantly, never
believe promises that are unrealistically good. If a brokerage can
deliver astronomical returns, why do they need your money? In all,
good thinking and hard questions at the beginning can save you a lot
of money in the end. Be wise.
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