How To Spot An Investment Scam

We seem to be hearing about a lot of investment scam situations these days. Today we live in a complex world full of investment opportunities. Many of them are very good, but many are investment scams. It has become very difficult for even experienced investors to recognize when one of these opportunities is legitimate, and when it’s fraudulent. It seems that everywhere you look, you’re presented with some kind of investment idea. Solicitors may attempt to contact you via, telephone, U.S. mail, television, internet or email. There are a few “red flags” to watch out for that will help you avoid the ones that are investment scams. There are also some easy ways for you to “check-out” or verify that an investment opportunity or solicitor is safe to deal with.

Red Flags

We’ve all heard the timeless admonition, “If it sounds too good to be true, it probably is.” While this is great advice, it can be hard to know the difference between “good” and “too good”. Investment scam-sters make their living by making deals sound both good and true. Here are a few tactics to watch out for:

• The "Phantom Riches" Tactic — dangling the prospect of wealth, enticing you with something you want but can't have. "These oil wells are guaranteed to produce $5,500 a month in income."

• The "Source Credibility" Tactic — trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience. "Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn't produce."

• The "Social Consensus" Tactic — leading you to believe that other savvy investors have already invested. "This is how ___ got his start. I know it's a lot of money, but I'm in — and so is my mom and half her church — and it's worth every dime."

• The "Reciprocity" Tactic — offering to do a small favor for you in return for a big favor. "I'll give you a break on my commission if you buy now — half off."

• The "Scarcity" Tactic — creating a false sense of urgency by claiming limited supply. "There are only two units left, so I'd sign today if I were you."





Other signs to be cautious of would include:

1. They want you to make an immediate decision. If they are calling you, they might even have a courier in the neighborhood ready to pick up your check right then. High pressure to do something now is a sure sign of an investment scam.

2. Calling it a “guaranteed” investment, with little or no risk, or “as safe as a bank CD”. (Keep in mind that I'm talking about securities here, not insurance products like fixed annuities.)

3. Recommendations based on rumors, tips, inside information or an unannounced breakthrough.

4. Recommendations based on the seller’s ability to predict future events.

5. Requests for your credit card number for any reason other than to make a purchase. Requests made for “identification purposes” or “verification purposes”.

6. Unwillingness to provide written information, state securities registrations, or verifiable references.

7. Investment opportunities in another country or that involve an offshore bank.

8. Unwillingness to let you discuss the investment with a third person. Many times they want you to keep the investment a secret.

9. They might send out account statements or letters that are not on company letterhead, another investment scam red flag.

Check out the seller

Ask the person if they and their firm are registered with FINRA? The SEC? A state securities regulator? If so, which ones? And then, verify the answers. To check the background of a broker, use FINRA BrokerCheck or call 800-289-9999. For an investment advisor, use the SEC’s Investment Adviser Public Disclosure Web Site. Many advisors today are not securities licensed, nor are they Registered Investment Advisors. In this case they may be licensed to only deal with insurance products like fixed annuities and life insurance. You can check out these advisors with your state insurance department to see if anyone has filed complaints against them, etc. It’s always a good idea to check out some of the person’s references too.

Check out the investment

Ask the person if the investment is registered with the SEC or with your state securities regulator. Then use the EDGAR database of company filings to confirm what the salesperson is telling you. Also call your state securities regulator to find out what they know about the company. Call a few of the company’s big customers and suppliers to make sure that they are really doing business together. If the investment is an insurance product it would not be registered with the SEC or state securities regulators, and you would need to check with your state insurance department. They will have a list of insurance companies that are licensed to do business in your state. Make sure the company is licensed, and then check out their financial strength ratings through A.M Best, Moody's or Standard & Poors.

There are many legitimate investment opportunities, and sales people out there. But unfortunately there are also those who would take advantage of you. And as we have seen in recent happenings, it’s often difficult to tell the difference between the two. When it comes to making a new investment, it’s always best to listen to your instinct, and not rush into anything. A good deal will still be a good deal tomorrow. And there is always plenty of time for you to do research to make sure you’re dealing with a good source.

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