Thursday, August 05, 2010

Guest Article: Investment Fraud: How to Keep Scam Artists Out of your Life


In these tough economic times with jobs in jeopardy, health coverage in doubt, and markets in turmoil, it is difficult to pause and think constructively about investing for retirement. The best time to start is now, particularly if you are young, but for older Americans, the pressure is on due to recent losses sustained when stock and real estate “bubbles” burst. However, the desire for quicker and bigger gains only sets us up psychologically for the carefully designed plans of a clever scam artist.

How do you protect yourself from investment fraud? You are your first and last line of defense when it comes to fending off con artists. You must know your business partners, become alert to the warning signs, and be aware of the more common “pitches” that are made from time to time.

Business Partners

Lessons learned in the forex trading industry are illustrative of the issues here. An excellent forex demo account was no indication of financial safety or soundness. Fraudulent brokers made off with millions. The Internet has enabled online trading with business partners we never see “face-to-face”. Make sure your bank has a strong balance sheet, and that your broker is above board and onshore. Consult your banker or broker for advice on every investment deal.

Warning Signs

Some signs, though obvious, need repeating. Here are a few tell-tell signs:

• Unsolicited offers by any medium should be questioned or avoided;
• If it sounds too good to be true, it most likely is;
• If there is little or no risk, then why isn’t everyone doing it;
• If there is urgency for action, slow the process down or walk away;
• Swindlers love to talk to prevent you from asking questions;
• If there is nothing in writing to explain it, then why consider it;
• Swindlers love to sell overly complex securities – avoid them;
• Con Artists try to gain your confidence by looking professional;
• Referrals from friends – Swindlers thrive on these, so beware.
• If asked for a blank check or to wire funds, avoid at all costs.

Actual Scams Often Repeated

The criminal element is very organized and educated in the art of deception. The FBI assesses the annual take by crooks to be $400 billion. It is not the elderly that are the most prone to the scam trade. Department of Justice studies conclude that anyone with a little college or a college degree is more susceptible to scams than anyone else. Three of the most frequent scams that seem to repeat every season with minor refinements to increase their appeal are as follows:

1. The Ponzi Scheme: The swindler pays high returns early to his clients so they will tell their rich friends about his great performance. Referrals pore in. The swindler does not have to solicit anymore. New deposits pay returns, after he transfers his take to an undisclosed account. Bernie Madoff and Kenneth Starr are recent news-makers;
2. The “Pump-and-Dump”: A crook acquires a large quantity of low-valued shares, and then employees a boiler shop to call people and spread inflated news about the company. New buyers rush to buy, thus driving up the price. The crook sells his stock, pocketing a large profit. The stock price plummets, leaving new investors confused and with large losses.
3. The “Tipster”: The Tipster calls 100 people, tells them he does not want their money, but passes along a “tip” to gain confidence. He tells half that the stock will rise, and the other half that it will fall. The next day, he now has 50 “marks” that believe he has insider knowledge. He may continue with this charade until he asks you for money for a “sure thing”.

Concluding Remarks

Investment fraud generally happens to those people who are the least prepared or who suspect it the least. Greed is the common theme. Protect yourself by heeding the warning signals and being aware of the most typical approaches that may come your way. Do your “due diligence” on your banker and your broker, and they will also protect you from the unscrupulous thieves that prey on the unsuspected.

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