Protect against investment fraud

Scam or true investment opportunity?

Everyone wants to get in early on that next hot investment opportunity. And while there are many legitimate options out there worthy of your hard-earned dollars, others are nothing more than well-marketed scams. Investment fraud is serious business, but with a bit of sleuthing smarts, you can protect yourself and your money.

Scams can happen to the best of us. Smooth talking opportunists offering the investment opportunity of a lifetime can build excitement and trust, playing to a mix of emotions ranging from hope to greed. The problem is, if it sounds too good to be true, it probably is!

The late Wall Street financier Bernie Madoff is proof of that. Madoff led what was arguably the largest investment fraud case in U.S. history, costing clients their fortunes and landing Madoff with a 150-year prison sentence.

For years, Madoff duped thousands of investors out of billions of dollars through a massive Ponzi scheme (explanation below). His victims included the well-educated, well-heeled, celebrities – even professional money managers. The case proved that anyone can be a victim of investment fraud.

And it happens more often than you might think. In a survey by the Canadian Securities Administrators (CSA), 40% of respondents believed they had been approached by a possible scam. The good news is you can protect yourself. And dealing with a strong, reputable financial institution with accredited, professional financial and investment advisors can go a long way to providing that added level of assurance of ethical dealings.ᶲ

Recognize the tricks

While each fraud is limited only by the creativity of its promoter, securities regulators have identified the most common investment scams you're likely to face. Here are a few:

Affinity fraud

The most damaging frauds are built on trust. Affinity frauds take advantage of your ethnic, religious or social affiliations to gain your trust. The fraud artist may already be an established member of the group, or may look to build relationships with the group's leaders to gain favour.

Ponzi or pyramid schemes

Typically the promoter starts with promises of quick riches, usually via ads or emails. Early investors are rewarded with "interest cheques", leading them to recommend their "winning" investment to family and friends. What they don't realize, is that the investors are paid with their own money or funds from newer investors, rather than from any actual profit earned from a "real" investment.

Pump and dump

It's supposed to be a-once-in-a-lifetime opportunity to get in early on a stock. As investors jump aboard, the stock gets bid to sky-high prices, giving the promoters a chance to unload their truck-load of shares at a tidy profit. As the stock price plummets, investors are left holding what little value remains.

Boiler rooms

This fraud begins with a phone call touting shares of a company about to go public, usually from a hot sector that's in the news.

To make the con believable, the fraudsters may set up a website, a toll-free telephone number, even a fake business address – all for an imaginary company. Once you send them your money, it's gone for good.

Offshore investment

Promises of profit, usually through tax-avoidance schemes, encourage you to invest your money "offshore" under this scam.

Once your money is outside the country, it's often impossible to recover as Canadian laws no longer apply. Since the scheme is usually illegal, you can wind up with an extra tax bill to boot.

Look for the warning signs

A guaranteed high return with "no risk" is a red flag to a possible scam. An investment can offer a guaranteed return, or a high return, but usually not both.

Beware of pledges that a stock will be listed on an exchange when that pledge comes without a prospectus, offering memorandum, or other backing. Even if an investment can be legally issued, you should still be given enough information to properly assess the risk you're taking.

Be wary of anyone pressuring you into a quick decision or asking you to pre-sign blank forms or documents you haven't read.

In particular, exercise caution if anyone tries to shepherd you into a "one-size-fits-all" solution with no regard for your specific investment goals, risk tolerance, and time horizons. While such discussions may lack the "sizzle" of the next hot offer, this proven process of matching investment strategies with individual needs is the hallmark of successful, long-term wealth accumulation.

Are you a target?

Simply put, if you have money, you're a potential target for fraud. But a study from the Canadian Securities Administrators does zero in on who's more likely to be approached and fall victim to a scam.

Ironically, those who see themselves as confident, experienced, self-directed investors are more likely to buy into fraudulent appeals. These individuals tend to do their own investment research and are less likely to work with an advisor.

Those who are aggressive with their investments, trade frequently, and are willing to take risks to obtain higher returns are also more susceptible to scams. Victims tend to be more trusting of others and fear that delaying an investment decision will mean a lost opportunity.

Being mature or well educated doesn't offer protection. The CSA found fraud victims are more likely to be over 55 or have university or college degrees.

Fraud artists see major life changes such as job loss, marriage, or pending retirement – and the uncertainty, hope, or fear that follows – as open doors to approach you. And if you've fallen victim to fraud in the past, watch out. Statistics show you're more likely to be targeted again, either by the same person or someone they've sold your information to.

Protecting your money

Research estimates that 70% of fraud victims don't recover a cent once their money's been taken. Here's how you can avoid joining them.

Have a plan

Having a financial plan is an important step in guarding against fraud. Knowing what your investment objectives are and understanding your risk tolerance will help keep you focused on investments that are right for you.

Buyer beware

Treat investing like a major purchase. Take your time, ask questions, get full answers and get information in writing.

An accredited financial advisor, accountant, or lawyer can be a valuable ally in steering you clear of fraud. Ask for a second opinion about any investment opportunity you're considering and aren't sure of.

Look behind the mask

Con artists make first impressions a priority. Don't be taken in by a slick package. Check with the British Columbia Securities Commission to see if the person and the firm they work for are registered to sell investments, and if they have had complaints filed against them. Remember, trust but verify. It pays to do your research first.

In the end, the best advice may simply be to know yourself, know your investment, and know your advisor.

Unsure about an investment? Protect yourself. Talk to your BlueShore financial advisor to get an expert opinion that can help you determine if that "hot" investment is a real opportunity – or a potential scam.

To learn more about investment fraud, visit www.investright.org.