High-yield investment programs, or HYIPs, are one of the hottest investment scams today. The scam purports to offer investors extremely high rates of return on their money, but in reality most participants will have their entire investment stolen.

In 2009, the U.S. Securities and Exchange Commission (SEC) issued a warning to investors about HYIPs and similar banking-related investment frauds. The Financial Industry Regulatory Authority (FINRA) has stated that virtually every HYIP it has reviewed appears to be fraudulent. (For more, see Affinity Fraud: No Safety In Numbers.)

IN PICTURES: Top 5 Reasons Why People Go Bankrupt

The Lure of High Returns
HYIP scams are readily identifiable by the incredibly high rates of return they advertise to lure in victims. In the current low interest environment where banks are offering less than 2% interest annually on your deposits, HYIPs appear to offer a very lucrative opportunity.

HYIP programs claim to make extraordinary returns through a variety of implausible stories, including stock market trading, sports betting or other alternative investments. A quick survey of several HYIP scams showed advertised rates of return ranging from 100% per day to 0.5% per day. (For more, see Are Structured Retail Products Too Good To Be True?)

These unsustainable rates of return clearly indicate that these are not real ventures. Consider what you personally could do if you needed to raise money for a business venture. One of the easiest things to do would be to take a cash advance from your credit card, and pay an interest rate of perhaps 20% per year. This is a high interest rate.

But let's say that alternatively, you could set up a HYIP-type program where you could loan money from investors for 1% interest per day. If you chose this option, you would be paying an effective rate of interest of about 3,600% per year! Any legitimate businessperson would be able to obtain financing at a lower rate.

IN PICTURES: 4 Biggest Investor Errors

Just Another Ponzi Scheme
So how do these HYIP schemes manage to pay over 3,000% interest rates when banks pay 2%? The short answer is that they don't. In reality, a HYIP is just a Ponzi scheme. The money from new investors is used to pay interest to old investors. This creates a need for new investors, which increases exponentially.

The more money that is invested, the more new money must be obtained to continue paying old investors. At some point, it becomes impossible to bring in enough new money to keep the scam going. At this point, having accumulated the most money possible, the organizer of the HYIP takes all of the money invested and disappears. (Confused? Check out What's The Difference Between A Ponzi Scheme And A Pyramid Scheme?)

If It Seems too Good to Be True ...
It is easy to spot the vast majority of HYIP scams. Many HYIPs claim to offer such absurdly high rates of return that even the most naive of investors should be skeptical. For the most part, you can avoid these scams just by following the old rule: if it seems too good to be true, it probably is.

Note that for a while, it is possible for a HYIP to pay out returns to the first people in on the scheme. This is important because this allows HYIPs to gain good reviews from real investors in order to lure in others. Don't fall for it. You never know when the scammers will close up shop, and your money will be long gone.

The SEC suggests you watch out for the following signs of HYIP fraud:

  • Excessive, unsustainable returns
  • Schemes involving fictitious financial instruments
  • Secrecy surrounding transactions
  • Offer a supposedly exclusive opportunity
  • Vague and inordinately complex investment pitches

The SEC advises that individuals that have information about HYIP scams should contact the SEC's Division of Enforcement.

The Bottom Line
When it comes to investing your money, don't be drawn in by scams that seem too good to be true. Stick with established financial institutions and investments that are clearly legitimate. If there is any doubt, do not hand over your money. (To learn more, check out The Biggest Stock Scams Of All-Time.)

Find out what happened in financial news this week. Read Water Cooler Finance: GM's Dramatic Return.

Related Articles
  1. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  2. Financial Advisors

    SEC Audit? How Financial Advisors Can Be Ready

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  3. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  4. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  5. Active Trading

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
  6. Investing News

    What Affirmative Action Means for Businesses

    A look at what Affirmative Action means for your business.
  7. Professionals

    How Advisors Can Help Clients Spot Elder Scams

    Financial crimes against the elderly are on the upswing. Here's what financial advisors can do to help protect their most vulnerable clients.
  8. Investing

    Protect Your Creations--Register Your Trademark

    Federally registering your brand name or logo offers the broadest protection against potential trademark infringement.
  9. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  10. Economics

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. What is the SEC's escheatment process?

    The U.S. Securities and Exchange Commission (SEC) does not have its own escheatment process. Rather, the SEC notes that the ... Read Full Answer >>
  3. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  4. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  5. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  6. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>

You May Also Like

Trading Center