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Watch Out for Investment Scams

All accredited investors are potential marks for financial scammers coming out of the woodwork following the JOBS Act.  As financial advisors and managers have predicted, the JOBS Act now permits all kinds of investment schemes to be publicly promoted to investors.

Fraud is not limited to the uninitiated or the new investor, in fact, fraud victims include bankers, hedge funders and other financially-sophisticated individuals whom. presumably, should be able to sniff out bogus investment schemes.  Bernie Madoff alone, for example, fleeced more than 8,000 well-heeled professionals in his twenty-year-long Ponzi scheme.

For investors, it doesn’t matter how much money you have nor how sophisticated an investor you are, some wily stockbroker, investment advisor, financial planner or insurance agent out there may just have your number.

Investment fraud losses in the US alone amount to over $40 billion annually.  That number is actually low since victims are often too ashamed of their gullibility to report it.  Investors may also be surprised at how highly educated and financially literate fraud victims typically are.  The vast majority of them, it turns out, are men.

“The Silver Bullet”

Investment fraudsters seduce their prey by homing in on their most sensitive financial concerns.  They talk a good investment game and offer ‘silver bullet’ solutions that are only available through them.  There’s almost always a need to ‘invest right away’, which deprives victims of the opportunity to dig into touted schemes or evaluate them with trusted advisors.

Investors should be particularly wary of investments that promise outsized returns with below-market risk.  Professional fraudsters may also cloud their personal backgrounds and withhold the intricate details of their investment ploys.  Paperwork, after all, gets in the way of their smooth sales pitches.

Typical Targets

Unfortunately, investors who are advanced in age, in frail health or in mourning, are a natural target for a con artist.  All the more so for those who have recently suffered financial losses, are managing their own assets for the first time or are heavily concentrated in a single stock or property.

Fraudsters seek out people of all ages who like taking risks, are open to new ideas or are trying to make up for past losses. People are particularly vulnerable to exaggerated investment claims when, like today, their more conventional investment options are not particularly attractive.

One of the techniques commonly employed by con artists is to join organized groups – at church or in country clubs, for example – where drawing one member into a get-rich-quick scheme can easily lead to the attraction of others.

What to Check for

Anyone solicited by a self-proclaimed investment guru should check into his employment record and steer clear of any promoter who bumped around from firm to firm.  Both federal and state securities and insurance regulators keep tabs on their licensed practitioners on the following websites:

Also, details of both publicly-traded companies and privately-placed investments can be found here.

Do’s and Don’ts

One good piece of advice is never to invest over the phone.  Always at least meet the promoter and see the whites of his eyes.  Also, don’t invest in any financial instrument you don’t understand or in any business whose assets are impossible to verify (such as gold mines or oil & gas wells).  Avoid any investment proposal that requires borrowing money or mortgaging homes and always get independent professional opinions of any investment requiring a material amount of your money.

In addition, make sure that your assets are custodied at a money-center bank, trust company or brokerage firm not controlled by the promoter.  The account should be in your name and not co-mingled with the assets of other investors unless you are investing in a fund.  Also, avoid any investment that requires opening an offshore account, which is difficult to trace.

Finally, con artists want to make investors feel like they’re getting a special deal, a once-in-a-lifetime opportunity.  They may tell you to keep it secret or, if you meet in an affinity group, to pass it on only to those other members whom you trust to keep it to themselves. As a general rule, just remember that, if the deal is as good as the investment guru says it is, why would he want to share it?

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