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Investment Fraud: What You Need to Know

By Allie Seligman on June 21st, 2016

Financial fraud comes dressed up lots of different ways, but those schemes (think Ponzi and pyramid), fraud and scams all have one purpose: getting your hard-earned money.

The stories aren’t anything you haven’t heard before. A retiree loses his or her life savings after being swindled by a nonexistent company. A hardworking family invests money into a promising stock opportunity, only to lose its nest egg.

Though the world of investment can be scary, there are precautions you can take to safeguard you and your loved ones from what could be a very expensive mistake.

Watch for secrecy. If you’re being sold a stake in a product you can never see yourself, a property you can’t visit or a service you can’t find any third-party information about, be wary.

Do your research. Ask questions and don’t assume the answer you get is right or true. Unfortunately, many fraud victims don’t take the time to check that the information they’ve been given is valid. Asking for information or references is a good start, but someone running scam likely has planted a network of fake information to back it up. Contact your state’s Securities Regulator for more help.

Deep dive. Before investing in a company, visit the SEC’s website to view its financial statements. If you’re having trouble finding any information not provided by the company itself, consider that a red flag.

Avoid “get rich quick” schemes. As with all things in life, if it seems to good to be true, it probably is. No investment is risk free and such promises are a sign of trouble. In general, low risk yields low reward, and a promise otherwise should put you on alert.

Know what to expect. If you’re promised large annual returns or otherwise guaranteed big money, take a step back. Research current returns on stock indexes to compare what you’re being sold with what you should actually expect.

Take your time. Pressure to commit to an investment before you have time to research could be a sign you’re dealing with someone who doesn’t have your best interests in mind. Be thorough; fraudsters often take the time to build a seemingly credible façade so you may have to dig deep.

Beware of unsolicited offers. Be wary of an individual or company that approaches you with an investment opportunity, especially through email or fax. Above-board investors likely won’t come looking for you.

Speak up. If you’ve been swindled, let go of embarrassment and shame and alert the SEC to prevent the same thing from happening to someone else.

The internet and social media

Think investment scams and what comes to mind? Free seminars boasting the deal of a lifetime? Phone calls promising an opportunity you can’t pass up? Not all scams are so overt.

The internet serves as a tool to get information to a large audience quickly without spending much, if any, money. Websites, social media profiles and online postings can create an air of credibility scammers may find hard to replicate offline. With a well-designed website and a robust social media following, scammers can trick potential investors (read: victims) into mistaking a scam for a legitimate investment opportunity.

Social media: Investors use Facebook, Twitter, LinkedIn, YouTube and other sites and services to research, background check, seek guidance and stay up to date with the market. Thieves use this behavior as an opportunity to deceive. Scammers use social media to create credibility and reach a large audience much more easily than in years past using other methods. Watch for unsolicited investment offers you receive via social media. This includes friends or acquaintances, especially those you haven’t been in contact with recently.

Investment newsletters: Real, credible information can be found in online postings and newsletters. That’s what makes it hard to discern what info you can trust. Fraudulent promoters work with scammers but claim to offer unbiased, independent recommendations. Not sure if what you’re reading is legitimate? Look for disclosure statements. Trustworthy newsletters will disclose who paid them, the amount and the type of payment, while shady publications will attempt to hide or minimize this information. Check the SEC’s website to see if it has brought action against the publication you’re reading.

Online postings and bulletins: Scammers may use online bulletin boards, chat rooms and other postings to reveal “insider” information. Because these sites allow users to hide behind usernames, don’t expect to find unbiased, legitimate information here. Though it’s not a given that the information you’ll find online is fraudulent, operate under the assumption that it could be.