The 10 Tell-All Questions About Investing Scams

scamsWith Bernie Madoff’s Ponzi scheme foremost in many investors’ minds, how can you tell whether an investment pitch is a scam? Keeping Bernie Madoff’s Ponzi scheme in your mind minds. “It pays to remember that if an investment opportunity sounds too good to be true, it usually is.” Here are 10 tell-all questions to consider:


1. Does it promise “low risk and high gain?”

“There is no such thing as a free lunch.” It’s a fundamental fact or basic of investing that the higher the potential return, the greater the risk and that you may never see that return. Do not fall for investments that promise spectacular profits or “guaranteed” returns.

2. If you don’t act now will it be too late?

Why will it be too late? Any legitimate investment will be there tomorrow, and next week, and next year. Never be pressured into investing in something because tomorrow might be too late. Even if it turns out that the stock doubles tomorrow, you should feel better knowing that you were cautious and responsible with your money.

3. Does the investment tip claim to predict the future?

“It will double in three months.” Oh, yeah? And where did your broker buy his or her crystal ball? Not only is this a ridiculous promise for a broker to make, it’s illegal. Go aheaed and report this infraction to his or her sales manager. And if the matter doesn’t get satisfactory attention from a supervisor, contact the Financial Industry Regulatory Agency (FINRA).

4. Do you know the background of the salesperson and his/her employer?
Any individual selling securities to the public must pass a background check, a series of examinations, and be registered with FINRA. Likewise, their employers must also be known to FINRA and the SEC. If you would like to check up on the background of your broker or brokerage firm, use FINRA’s BrokerCheck page. But remember, even if they don’t have any complaints against them, it doesn’t necessarily mean they can be trusted. You could be “Scamee No. 1.”

5. Does it “guarantee” anything?
It is impossible to guarantee the performance of any investment, but if your broker is doing so he could get tossed out of the industry.
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6. If you incur any losses has the salesperson offered to reimburse you for any losses you might incur?
One more no-no that your broker isn’t supposed to and can’t promise you. This one can get him or her booted, too.

7. Does your broker say that you are you one of the “lucky few who have been chosen” to invest in XYZ company?
While this may make you feel special, don’t fall for it. You probaly just happen to be one of the lucky few who answered the phone.

8. Does the salesperson claim that he or she has also personally invested in the company?
What difference does it make to you whether he or she made a bad investment? Do you trust the salesperson to call you if and when the investment goes sour? And will he or she get out first?

9. Is the salesperson unwilling to supply financial statements or a prospectus?
If a new company is just going public (an IPO, which stands for initial public offering), you must be given a prospectus. It is long and written in legalese and printed on very thin paper that you can barely read. Read it anyway. Especially the part called “Risks to Investors.” If the company in question has been around awhile, ask to see the financial statements for the past two years.

10. Does the salesperson claim that it is “a hot inside tip?”
This is particularly important to pay attention to — not because it might make you rich, but because it could land you in jail. It is illegal to pass on or act on material that is inside information. Anyone telling you otherwise is a liar.

These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies, and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

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