Ten Ways to Spot an Investment Scam
February 27, 2009
Ten Ways to Spot an Investment Scam
Bernie Madoff's $50 billion hedge fund scam duped many prominent investors. The fact is though, most investment scams operate on the grassroots level--they are surprisingly common, and they take advantage of fairly average investors. How confident are you that you can spot an investment scam?
Here are ten signs that you might be talking to the next Bernie Madoff:
1. Shhh... this deal is secret. If your guy doesn't want you to tell anyone about an investment proposal, it's probably because he's trying to rip you off.
2. They want personal information over the phone. Guard personal information carefully, especially your Social Security and account numbers. Don't give this information out over the phone unless you know the person you are speaking with and have verified who the employer is.
3. "Guaranteed" high returns. Truly guaranteed investments carry pretty low interest rates right now. Whenever someone offers you a guarantee, you need to know whose guarantee it is, and get it in writing. In particular, beware of high returns--10%, 15%, or more--that are said to be "guaranteed." Such things simply do not exist at this time.
4. You've never seen their offices. Before doing business with someone, ask to see the place of business. This will quickly smoke out the complete fakes, and in any case will give you a feel for the type of organization they run.
5. You receive a request for information by e-mail. In a technique known as phishing, scam artists may send you an e-mail claiming to be a routine request for updated information--often posing as your bank or other financial institution. These scams can be very sophisticated, and include links to realistic-looking web sites. However, never give out information in response to an unexpected e-mail. Only give information to known representatives of institutions you are doing business with, and only then if it is relevant.
6. This is routine--no need to involve your lawyer. A good way to chase off scam artists is to ask for written material so your lawyer can review it. If they hesitate, they're probably hiding something.
7. Time pressure--"this deal has to be done today." Most investments don't have deadlines--time pressure is usually a ploy to get you to act before thinking.
8. Outrageously high past returns. Three things to ask about that gaudy track record: how much money does it represent, what percentage of the firm's managed money is it, and have the results been audited by a reputable accounting firm.
9. No regulation. Legitimate brokers are registered with the NASD, investment advisors with the SEC, and banks with a state or national Comptroller of the Currency. Regulatory agencies generally have online resources where you can check out the status of any registered institution.
10. Something for nothing. Anything that starts with you magically receiving money from an unknown source is probably a set-up for a scam.
Scam artists may be charming. Scam artists may hang out with rich people. And scam artists may be smart. But with a little caution and common sense, you can avoid funding some creep's retirement in Bermuda.
