Quatloos! > Investment
Planning > Avoiding
The last several years, I have seen an increasing
number of people defrauded by investment scams, probably made easier
because of all the money everyone is making in the stock market.
But before making any investment, you should ask the following 10
1. Is the investment audited by one of the major international
accounting firms? Real investments are audited by one of the
large international accounting firms; indeed, a real investment
will hold this out as a selling point. On the other hand, a scam
investment will not be audited by anyone, or by a small firm nobody
has heard of (and may in fact be a sham).
2. Is the investment registered with your state securities commission
or with the SEC? Real investments must be registered with your
state securities commission, or with the U.S. Securities & Exchange
Commission. This is true of offshore investments which are marketed
to you in your state -- they must be registered as well, and avoid
anyone who says they are "exempt" because they are offshore. Avoid
3. Is the investment listed in the
Wall Street Journal, London Financial Times, or similar well-known
financial publication? Real investments will be listed in a
major financial publication, or findable in some other major financial
resource. You typically can't find scam investments in these publications.
Beware "CUSIP" numbers as an "authentication" of the investment
-- anyone can get a CUSIP number for just about anything so this
doesn't help you.
4. Is everything about the investment out in the open? Real
investments are completely "transparent", meaning that you can clearly
see and understand each and every step of where your dollars go
and how they grow. Scams hide or obfuscate one or more parts of
the plan, speak in terms of secrecy, may allude to a "secret banking
system" or similar nonsense, and might even require you to sign
a secrecy or confidentiality agreement prior to seeing the plan
(it will almost always be a scam if you have to sign such a document).
5. Are you allowed to seek independent legal counsel prior to
making the investment? Real investments will encourage you to
seek independent legal and financial advice prior to making the
investment. Scam investments will give you bizarre reasons why you
shouldn't talk to someone, such as "CPAs are trained not to speak
of this!", and they may even require you to sign a secrecy or confidentiality
agreement which will discourage you from consulting anyone before
making your investment.
6. Is the seller licensed with your state securities commission
or with the NASD? Real investments are sold by licensed stockbrokers
who are registered both with your state security commission and
with the National Association of Securities Dealers. Scam investments
are sold by scam artists who are not registered with anyone, or
perhaps with some phony-baloney foreign stock exchange (or more
7. Does the promoter have a good background? A real promoter
will be "clean" and you can verify this by hiring a private investigation
firm to conduct a basic investigation. A scam artist will often
be using an alias, and will often have a criminal background (though
8. Does the investment "make sense"? Avoid all unregistered
investments which are "guaranteed" as this is a sure sign of a scam
(if the guarantee would be real, it would be registered). Avoid
investments which make representations which are unusually high,
i.e., funds and programs which promise to pay more than 50% per
year, or promissory notes and CDs which promise to pay more than
10% per year.
9. What does law enforcement say about this investment? Don't
hesitate to call law enforcement, such as your state security commissioner
or attorney general, before you invest. A real promoter will have
nothing to fear if investigated (and can probably clear it up with
a phone call). This is just a part of doing business for them. On
the other hand, a scam artist probably will not stand up to this
10. Is it too good to be true? If you have to ask yourself
this question, it probably is.
While these questions will not keep you from being scammed in every
case (some scam artists are really sharp!), they will probably help
you see the truth 9 times out of 10. Truth is, if you have lingering
fears you are probably better off putting your money into a nice,
relatively safe investment which just tracks the market, such as
the Vanguard 500 mutual fund or similar "no-load" index fund.
Private Placements: So-called Private Placements are an
investment which can in some states in some very limited circumstances,
be sold without registration with your state securities commission.
Many (perhaps most) of these are scams, and even the legitimate
ones are so risky that they are unsuitable for most people, and
so you should probably just avoid them. Never, ever invest in a
private placement without first consulting a qualified, independent
attorney and having him do some investigation. Private placements
are really only suitable for people who have a great deal of wealth,
and who can "gamble" a very small portion of their wealth
on a particular project. But that's exactly what it is, a gamble,
and so don't make the investment unless you can stand to lose every
penny of what you invest.
The Securities & Exchange Commission's "10
to Ask About Any Investment Opportunity"
( This is copied from http://www.sec.gov/consumer/10quest.htm
"With any investment, whether promoted in person, by mail,
telephone, or on the Internet, a wise investor should always slow
down, ask questions, and get written information. Take notes so
you have a record of what you were told, in case you have a dispute
Is the investment registered with the SEC and the state securities
agency in the state where I live or is it subject to an exemption?
Is the person recommending this investment registered with
my state securities agency? Is there a record of any complaints
about this person?
How does this investment match my investment objectives?
Where is the company incorporated? Will you send me the latest
reports that have been filed on this company?
What are the costs to buy, hold, and sell this investment?
How easily can I sell?
Who is managing the investment? What experience do they have?
What is the risk that I could lose the money I invest?
What return can I expect on my money? When?
How long has the company been in business? Are they making
money, and if so, how? What is their product or service? What
other companies are in this business?
- How can I get more information about this investment, such
as audited financial statements?"