Monthly Investment Message: June 2014

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

Investment Fraud and How to Avoid It

Each year, thousands of consumers lose billions of dollars to investment fraud. It is not uncommon for con artists to use chat rooms and social media to post “urgent” messages telling people to buy a particular stock. This type of fraud, known as pump and dump, artificially inflates the price of shares and allows stock manipulators to make a huge profit by bidding up stock prices and selling their shares before prices fall.

Scam artists also use telephones to take advantage of unsuspecting victims, often mimicking sales techniques of legitimate investment firms. So-called boiler rooms are a favorite way for swindlers to contact large numbers of potential victims. Even if a swindler has to make several hundred calls to find a victim, the opportunity to pocket thousands of dollars of someone’s life savings is still good pay for the time and expense involved.  The movies Boiler Room and The Wolf of Wall Street provide valuable insights into how unscrupulous operators steal victims money by peddling worthless or nonexistent securities.

So how do you know if an investment is legitimate or fraudulent? Below are five “red flags” that the Federal Trade Commission (FTC) provides to help investors spot a scam:

  • Future Predictions– Beware of marketers that guarantee an investment’s future return. With the exception of bonds, investment returns are unpredictable and the value of securities rises and falls with market trends, interest rates, and other factors. Some fraudulent marketers contact consumers several times: first to make a prediction and, next, to close a sale after they prove that their prediction came true.

  • Quick Cash– Scam artists often promise fast, low-risk payoffs and compare their returns to low rates available on bank accounts or bonds. Their implication is that victims are “suckers” for settling for low returns and that they have a sure path to high returns in a short period of time. Of course, there is no such thing as a free lunch. Even with perfectly legal investments, the higher an investment’s potential yield, the higher the potential risk of loss as shown in the “Investment Pyramid” in Unit 2 of Investing For Your Future:

  • Obscure Origins– Background information about the origin and performance of fraudulent investments is misleading or not provided. This is because marketers do not want consumers to be able to assess their claims. Be wary, also, if you can’t find information about an investment product online or in reputable investment publications (e.g., newspaper stock listings),

  • Immediate Response– Requiring an immediate response and deposit of funds is another hallmark of investment fraud. Scam artists might say something like “you must buy before others find out about it” or request that you send money by courier or overnight delivery. Urgency is important to swindlers so they get victims’ money fast before victims have time to become suspicious or contact others for advice.

  • Recovery Attempts- Fraud victims’ names are widely circulated. If you’ve fallen prey to a previous scam, you could get a call promising to recover money that you’ve already lost. Of course, this “service” comes at a price. Be suspicious if people call and already know where you’ve invested before.

The bottom line: Beware of callers you don’t know and be very wary of disclosing personal or financial information over the phone. If you don’t want a seller to call you back, say so. If they call back, hang up. Don’t buy investments from unfamiliar companies and ask for written information, such as a prospectus, about an offer. Check out unfamiliar companies or suspicious offers with government agencies. Don’t be pressured into making an immediate investment decision and never give out bank or credit card numbers on calls you don’t initiate.

If an investment deal sounds too good to be true, it probably is.

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