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Quatloos! > Investment Fraud > Financial Planning > Avoiding Investment Scams

Avoiding Investment Scams

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 questions:

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 unregistered investments.

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 recently, "cyber-exchange").

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 not always).

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 scrutiny.

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 Questions
to Ask About Any Investment Opportunity"

( This is copied from )

"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 later.

  1. 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?

  2. Is the person recommending this investment registered with my state securities agency? Is there a record of any complaints about this person?

  3. How does this investment match my investment objectives?

  4. Where is the company incorporated? Will you send me the latest reports that have been filed on this company?

  5. What are the costs to buy, hold, and sell this investment? How easily can I sell?

  6. Who is managing the investment? What experience do they have?

  7. What is the risk that I could lose the money I invest?

  8. What return can I expect on my money? When?

  9. 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?

  10. How can I get more information about this investment, such as audited financial statements?"

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Securities Fraud
Stock and Bond Fraud, including Boiler Rooms / Pump and Dump Schemes, Mutual Fund & Hedge Fund Fraud, FOREX scams, plus Churning, Private Placements, Venture and Bridge Funding, IPOs, Viaticals Fraud, HYIP and Prime Bank scams, MTNs, Historical Notes, Recovery Schemes, etc.

Financial Planning and Estate Planning Scams
Discusses abuses and issues in financial planning, including questionable compensation practices, bogus institutes and accreditations, bad products, annuity abuse, inappropriate life insurance sales, living trust mills, and related misconduct. Also answers questions about usually legitimate but developing areas such as life insurance premium financing, life settlements, charitable gifting strategies, etc.

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