Red flags of investment fraud

Investment scams can take many forms—and fraudsters can turn on a dime when it comes to developing new pitches or come-ons for the latest fraud. But while the hook might change, the underlying tactics remain the same. To stay on guard and avoid being drawn into an investment scam, look for these red flags:

• Guarantees: Be wary of anyone who guarantees that an investment will make you money. All investments carry some degree of risk.
• Unregistered products: Many investment scams involve unlicensed individuals selling unregistered securities—like stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments, such as prime bank investments.
• Overly consistent returns: Any investment that consistently goes up month after month—or that provides remarkably steady returns regardless of market conditions—should raise suspicions, especially during turbulent times. Even the most stable investments can experience hiccups once in a while.
• Complex strategies: Think twice whenever someone credits a highly complex investing technique for unusual success, especially if the technique doesn’t make sense to you. Legitimate professionals should be able to explain clearly what they are doing. It is critical that you fully understand any investment you’re seriously considering—including what it is, what the risks are and how the investment makes money.
• Missing documentation: If someone tries to sell you a security with no documentation—that is, no prospectus in the case of a stock or mutual fund, and no offering circular in the case of a bond—he or she may be selling unregistered securities. The same is true of stocks missing their stock symbols.
• Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error—or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets. For instance, is the investment adviser also the custodian of your assets? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts.
• A pushy salesperson: No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you’ve got to “act now.” If someone pressures you to decide on a stock sale or purchase, steer clear. Even if no fraud is taking place, this type of pressure is inappropriate.
   

For more information about avoiding investment fraud and to obtain a free DVD of the award-winning documentary, Trick$ of the Trade: Outsmarting Investment Fraud, visit the Fraud Center at the FINRA Foundation’s SaveAndInvest.org.