December 4, 2017
Strategic Management

Ways to protect yourself from investment fraud

Bob Ainsworth

I have inside information that XYZ stock is about to double. You don't want to lose out on this opportunity but I need an answer right away. This investment will double in 90 days, 120 at the latest. You've invested $1,000 and done great — now it's time for the kill, invest $25,000. Think of how proud your family will be when you take command of the finances and make tens of thousands in profits.

Investment fraud comes in as many shapes and sizes as shoes, and con artists will try all of them until they find one that fits you and robs you of your hard-earned money.

Bernie Madoff used an affinity scam by focusing on fellow Jews and then perpetrated a Ponzi scheme where he used new investor money to pay extraordinary investment gains to the earlier investors. He also effectively bribed the investment advisors who funneled their client's money to him by paying them a larger-than-normal finder's fee. Those bribes allowed Bernie to get away with limiting the due diligence the financial advisors should have performed and to insist that his name be kept out of any marketing materials. He was the Babe Ruth of investment fraud criminals.

Investment scams aren't always on the grand scale of Madoff's $30 billion fraud.

Sometimes criminals are brazen in publicizing their activity. Two men were charged by the U.S. Securities and Exchange Commission recently with creating a hedge fund in the U.S. that would allow investment in a Canadian hedge fund. They actively solicited investors and 50 people believed their story and gave them $15 million. They used the money for personal spending and to pay off investors in two other hedge funds they had created.

Fake accounting is another way to steal money. A registered Massachusetts broker dealer had the authority from his clients to buy and sell stocks for their accounts. He would buy blocks of stocks and then allocate the gains or losses to himself or his clients. You can guess what happened: He took the gains and his clients took the losses. He took $1.3 million.

Now that you want to keep your money in a mattress, there are ways to protect yourself.

There are websites that offer great tips: FINRA.org (The Financial Industry Regulatory Authority), FBI.gov, the Securities and Exchange Commission has the website Investor.

There are also basic tips that have general approval. They include:

1. Avoid unsolicited investment schemes. They are looking for suckers.

2. If it sounds too good to be true, it is. For some perspective, stocks generally over the long term earn 8 percent, bonds 4 percent and money market 2 percent. Returns that exceed these averages may hint at fraud.

3. No returns are guaranteed. Returns are a way of being paid for taking a risk. A guarantee means no risk. The only guaranteed security is by the U.S. government.

4. Invest right now or you'll miss out. That is a pressure tactic. A good investment can be made any time.

5. Check out credentials. Call your secretary of the state's office, the SEC or accreditation organizations. Go to FINRA BrokerCheck to get information on brokers and investment advisors.

6. Invest because I am like you, trust me. As President Reagan said, trust but verify.

7. Discuss your decision before investing. Verbalizing an opportunity to a family member or another investment professional or your CPA is a good way to test the legitimacy of the idea.

8. Ignore social pressure. An investment needs to be right for you, not for some crowd of people. Stay away from free seminars or pitches that rely on crowd thinking.

9. Use the internet. Search for the name of the investment offeror.

10. Watch for the "go for the big kill" tactic. You make a profit on a small amount, now invest your entire savings and make a fortune.

11. Believe your gut. At the end, your gut instincts are a good warning sign. If it feels bad, it probably is.

Bob Ainsworth is a CPA and former CFO of New England Business Media, the owner of the Hartford Business Journal. He is the author of a crime-thriller book, "A Fraud of the Ponzi Kind."

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