Who’s Watching Your Wallet?

The name Bernie Madoff will always be associated with greed, deception, and the infamous Ponzi scheme. There is a kind of collective disbelief and awe over its magnitude and the length of time that he was allowed to operate. Financial fraud is nothing new, and according to the Federal Trade Commission, complaints have risen 62% since 2008. No one is immune; the con artists are experts in manipulation, exploiting news headlines and even sacred events to find investors. They commonly infiltrate churches, organizations, and social groups, and create venues such as “free educational dinner” seminars as a means of networking and selling their wares.

So what can you do to protect yourself?

The scam remains the same

Technology has given con artists new methods to connect with potential victims but the scams they use are time tested. Education and awareness may be your best defense. Here’s a partial list of some of the most commonly reported practices.

Investment fraud:

Selling a product, stake in a company, or a promised rate of return that cannot meet expectations and/or does not exist. These types of “affinity fraud” often utilize friends, family, or organizational ties to unknowingly recruit new victims.

1. Investment scams
• The Ponzi scheme:

  The top scam: A pyramid scheme with new investors covering costs of earlier investors.

  Victims invest with promises of extraordinary returns on seemingly legitimate investments. Initially they may receive dividends, prompting friends and family to invest. The scheme lasts as long as new victims invest but eventually cannot be sustained.

• Pump and dump:

  Artificially inflating the price of a stock to sell off at its peak.

  Possessing large shares of a worthless stock, the con artist uses e-mail, fake mailers, phone calls, or message boards to hype the company’s profits and/or claim to have inside information. This creates a flurry of investors, pushing up the price of the stock. Once the con artist dumps his/her shares, the stock plummets and the other investors lose their investments.

• Mirror trading:

  A tool that allows investors to automatically mirror, in real time, any trade that their broker may make.

  But this may be another tool for market manipulation, and the broker may conceal his/her true intentions, leaving you holding the bag.

• Promissory notes:

  Selling fraudulent or risky promissory notes with high-yield returns.

  Investors are enticed by promises of high-yield returns under the guise of being low risk. They are convinced to buy into a company “on the ground floor” through private loan guarantees, shares, or some equity stake in said company. The company is backed by a range of ventures from new technology, a hot product idea, or a business opportunity. Many times the company may not even exist.

2. The advance-fee scams:
• Settling high debts:

  Settling debt for pennies on the dollar by a so-called expert.

  The scammer will pose as an expert such as a lawyer, accountant, or some other knowledgeable agent, often with false or exaggerated credentials. You pay an up-front fee for them to begin the process of reducing credit card, mortgage, or other debt. The fee is paid and no service is provided.

3. Insurance scams:
• False policies and diverted funds:

  Unscrupulous insurance agents or brokers sell a policy: home, auto, health, or life. The policy is a complete fabrication and the victim’s funds are diverted into the scammer’s account.

• Securitized life settlement contracts:

  Investing life insurance funds into securities and bonds with a fixed rate of return.

  This type of investment has a complicated internal structure. Any built-in risk-reducing features are proven fraudulent. The bonding agencies often operate in unregulated oversea territories or are fabricated. Investors are left with meaningless paper in the end.

• Annuities or life insurance policies:

  Selling your annuity or signing over death benefits for a single lump sum.

  Again, the complexity allows con artists to victimize the individual. In these cases they particularly prey on the sick and elderly.

Don’t Get Trapped

Products:

• Distressed real estate
• Energy investments
• Gold/Precious metal investments
• Promissory notes
• Securitized life settlement contracts

Practices:

• False or exaggerated credentials
• Affinity fraud
• Mirror trading
• Unsolicited securities and investment advice by unlicensed agents
• Private placements

Investment Dos and Don’ts

Do:

• Always do your own research before investing
• Get a written prospectus and read it fully
• Ask for references and check them out
• Make sure you understand the investment. If it is overly complicated or unclear, don’t invest
• Check credentials with state securities registries. Only deal with licensed attorneys or CPAs
• When investment proposals have language about a “trust,” have your tax attorney or CPA review the document
• If you enter into a “trust,” use a corporate or professional trustee
• Separate your money from advisers/brokers. Make sure it is held by an independent “third-party custodian,” and at a “securities broker dealer.” Make sure you have 24-hour access to your account; delays in withdrawing your money should be a red flag
• Stay away from anything that has little to no transparency, verifiability, and/or full disclosure
• Stay away from anyone who is opposed to you getting a second opinion
• Stay away from anyone who offers an incentive by getting new investors or new recruits

Don’t:

• Invest in an operation that functions solely overseas
• Invest when contracts have language in them about confidentially, especially “trusts”
• Enter into any “high-yield and low-risk” investment; they simply don’t exist
• Accept unsolicited investment advice from strangers via the phone, Internet, mail, conventions, or lunch/dinner seminars
• Invest in anything with up-front fees, especially with quick, guarantied, large back-end profits
• Invest when there’s a ticking clock. If an investment has to be made right away, it’s best not to invest altogether
• Invest in anything with guaranteed returns of 10%-15% or higher. Numbers that high can’t be guaranteed legitimately
• Invest with anyone advising you that the government has no legal right to tax, or claiming to have special tax shelters
• Invest with anyone with “secret knowledge” or “special connections”; even if it is true, it may be insider trading

Be wary of investing with someone in your community, workplace, place of worship, or other places where you might let your guard down. Con artists are masters in psychology; they play on emotional ties and try to gain your trust quickly. So don’t ever enter into any financial transaction on the basis of trust. Use simple Web tools and check on your broker (eg, www.finra.org or www.sec.gov). And remember, if something seems too good to be true, it probably is.

Reference

1. Blanton K. The rise of financial fraud: scams never change but disguises do. Financial Security Project of Boston College. http://fsp.bc.edu/wp-content/uploads/2012/02/Scams-RFTF.pdf.
2. Financial Mentor. Top 26 warning signs of investment fraud. http://financialmentor.com/free-articles/investment-advice/investment-fraud/top-26-warning-signs-of-investment-fraud.
3. FINRA Investors. HYIPs—High yield investment programs are hazardous to your investment portfolio. http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P121728.
4. Modern Medicine. Investment scams target busy physicians. http://www.modernmedicine.com/modernmedicine/Modern+Medicine+Now/Investment-scams-target-busy-physicians/ArticleStandard/Article/detail/714249.
5. North American Securities Administrators Association. Con artists find profit in get-rich schemes tied to economic uncertainty. http://www.nasaa.org/3809/con-artists-find-profit-in-get-rich-schemes-tied-to-economic-uncertainty/.
6. Physicians Practice. How Scam Promoters Use Fear to Target Physicians. http://www.physicianspractice.com/blog/content/article/1462168/2043015.
7. Scambusters. Investing safety. http://www.scambusters.org/investing.html.