How To Avoid Investment Fraud

How To Avoid Investment Fraud

Every year investors lose billions upon billions of dollars due to perpetrators of investment frauds. While in many cases fraudsters targets the elderly and/or novice investors, even the most astute investor can be ensnared by a good con artist! The best way for investor to not fall victim to investment fraud is to become educated and aware of the common signs of fraud.

To steal a phrase from your parents playbook, “If it sounds too good to be true, it probably is!” Investments that promise “big returns” and “virtually no risk” should always be viewed with a skeptic’s eye.

Sadly, the fight against fraud never stops because each year con artists discover new ways to dupe investors.

Most Common Fraud Red Flags

According to the North American Securities Administrators Association (NASAA) the following are the most common red flags to look for when it comes to fraud.

The Pitch: This investment has guaranteed high returns – no risk!

The Catch: There’s no such thing – the higher the returns, the higher the risk. This type of sales pitch is often aimed at people who are non‐risk takers, particularly those individuals who are on a fixed income or those who are near retirement and are worried about not having a large enough nest egg. Even with legitimate investments, know the risk level you are taking and invest only what you are willing and can afford to lose.

The Pitch: There’s a shortage – get in before it’s too late!

The Catch: If a legitimate deal, it’ll be there tomorrow. This type of sales pitch is used to create a false sense of urgency, whether it’s a limited amount of the investment product or a scarcity of time to invest. Don’t feel pressured to make a quick decision. Take your time and talk it over with an objective third party, some who can check the facts regarding the investment opportunity.

The Pitch: This is an offshore investment – tax free!

The Catch: You can defer paying taxes, but you can’t avoid paying them. This type of deal is often pitched as a secret and is an opportunity you should keep to yourself. Promoters of these investments hope to avoid hard questions from family, friends or financial advisers who might see through the scam. Often, your money will be transferred to overseas locations, making it harder to recover and even harder for the authorities to investigate.

The Pitch: You can profit like the experts – get the secrets to success!

The Catch: If the investment is so profitable, why do the investment promoters need to contact YOU out of the blue? Promoters utilizing this tactic are trying to convince you that he or she has access to inside information known only to a select few who are said to be making a lot of money. If you hear phrases like “secret markets,” “prime bank guarantees,” take your checkbook and run because secret prime bank markets simply don’t exist.

The Pitch: Great investment opportunity – your friends can’t be wrong!

The Catch: Fraudsters have been known to work their way into organizations and befriend members in order to sell them fraudulent investment products. The pitch relies on the trust you place in your friends and the fear you may have of not keeping up with them financially. Watch out for this sneaky greed factor since fraudsters often pay out profits to early investors who unwittingly convince others to get on the bandwagon.

The Pitch: You can trust me—I have credentials and extensive experience.

The Catch: The truth is that credibility can be stretched and faked. If the promoter is legitimate, he or she should have no qualms about your conducting a background check. Take the time to determine if the authenticity of the individual’s education and experience requirements by contacting the organization that issued the credential. Most importantly, contact your state or provincial securities regulator to determine if the person is registered to sell investments and does not have a disciplinary history.

How Can I Avoid Fraudsters?

No one knows how fraudsters operate better than the Securities & Exchange Commission (SEC), the nation’s top securities regulator. Below we list some tips from the SEC website on how to avoid fraud.

Ask questions and check out the answers. Fraudsters rely on the sad truth that many people simply don't bother to investigate before they invest. It's not enough to ask a promoter for more information or for references ‐ fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research.

Research the company before you invest. You'll want to fully understand the company's business and its products or services before investing. Before buying any stock, check out the company's financial statements on the SEC's website, or contact your state securities regulator. All but the smallest public companies have to file financial statements with us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances can open the door to fraud. Remember that unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions.

Know the salesperson. Spend some time checking out the person touting the investment before you invest ‐ even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run‐ins with regulators or other investors. You can check out the disciplinary history of brokers and
advisers quickly, and for free, using the SEC's and FINRA's online databases. Your state securities regulator may have additional information.

Be wary of unsolicited offers. Be especially careful if you receive an unsolicited fax or e‐mail about a company ‐‐ or see it praised on an Internet bulletin board ‐‐ but can find no current financial information about the company from other independent sources. Many fraudsters use e‐mail, faxes and Internet postings to tout thinly traded stocks, in the hopes of creating a buying frenzy that will push the share price up so that they can sell their shares. Once they dump their stock and quit promoting the company, the share price quickly falls. And be extra wary if someone you don't know and trust recommends foreign or "off‐shore" investments. When you send your money abroad, and something goes wrong, it's more difficult to find out what happened and to locate your money.

Additional Resources

There is plenty of information on scams and fraudsters, below we list some key links.

Securities & Exchange Commission (SEC) Website

Financial Industry Regulatory Authority (FI NRA) Website

This material is intended presented for educational purposes only and should not be used or relied upon to make investment decisions. Any references to returns are not to be relied upon as past returns may not be an indication of future returns.

Investors should carefully consider their personal investment objectives, risks, charges and expenses. Investing can result in the loss of some, or all of your principal, please consult a financial professional before investing.

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