AVOIDING INVESTMENT FRAUD IN FOUR STEPS

A few months ago I received a call from my dad.  He had received a phone call from someone claiming to be with the IRS demanding money.  These types of scam calls are prevalent and they target the 60 and over crowd in bulk, understanding that of the thousands of calls made, dozens and dozens will fall victim.  It’s a volume scheme and one more sophisticated citizens often manage to avoid.  But what about the scams that aren’t quite so black and white?  The ones presented as a sound investment by a slick, persuasive and seemingly credible promoter? Complex investment fraud schemes are more difficult to spot; the deceit often not becoming obvious until it is too late.

During my time with the Office of the New York State Attorney General Criminal Enforcement and Financial Crimes Bureau, I saw many of these kinds of scams.  A hard working family puts their money in the hands of a trusted professional offering substantial return on investment.  An investor putting hundreds of thousands into the arms of a wordsmith hawking the next great tech start-up.  Often times the victim investors turned over hard earned money for second and third times before finally learning  that they were the victims of fraud.   The more sophisticated the hawker, often times the more complex the scam.  This can make detection difficult.  That being said, there are a number of things you can do before turning over your money to ensure the investment is made with eyes wide open.

1.     TAKE YOUR TIME

When an investment opportunity is fraudulent, a promoter may try to entice you into making a quick decision.   After all, the sooner they get your signature and a check, the more difficult it will be for you to claw the money back.  In other instances, for example in a Ponzi Scheme, scammers need steady cash flow to sustain the scheme.  An investment promoter may attempt to pressure you into making a quick decision.  Be wary of phrases like “once in a lifetime opportunity.”  Those rarely present themselves.  In order to put additional pressure on you, the promoter may claim that only a limited number of shares exist for purchase at the current price point or give you an artificial deadline.  In the rare occurrence where this is true, you may cost yourself a little bit of money.  In the more likely scenario that this is a ploy to entice a quick, uninformed investment, you have saved yourself a boatload.

Scam promoters will often try to get you to invest the same day as your initial meeting.  Never do it.  Take the time to do your homework, ask questions and bring in trusted friends, colleagues and family for second opinions.

2.     DO YOUR HOMEWORK

A troubling aspect of the investment fraud I saw as a prosecutor was the lack of homework done by investors.   There are so many publicly available resources for investors to peruse before making a significant investment decision.  The first step, of course, is to Google the promoter and the investment opportunity he/she is recommending.  A fund soliciting significant investments should have a website.  So should the “next big tech start-up.”  The presence or absence of a credible website shouldn’t be a deciding factor (scam artists often establish a web presence and established funds may not have one to avoid solicitations), but locating and perusing a website should definitely be a step in your background research.  Take notes.  If the website makes reference to other products offered, Google those products.  Make a list of questions as you peruse the website to be referred back to during the “ask questions” and “second opinion” phases of your due diligence.

After conducting a thorough Google search, turn your attention to social media.  Friend the promoter on Facebook.  Look for shared connections.  Reach out to those people.  Do the same on Linkedin.  A scant presence on one or both of these platforms is a serious red flag.  Don’t forget about Twitter and Instagram as well.  These platforms may not give you the ability to vet the opportunity through other people, but they could offer clues as to the legitimacy of the investment opportunity.

After you have exhausted social media, turn your attention to other publicly accessible information.  Check whether the promoter is a registered broker-dealer (he/she doesn’t necessarily have to be depending on the type of investment) through FINRA (the Financial Industry Regulatory Authority).  If he/she is, you will be able to review their employment history as well as whether he/she has been the subject of any regulatory actions or complaints.  Check whether the investment vehicle soliciting your money has filed with the SEC.  This will provide you with a sense of the funding level sought.  The SEC requires some brokers and/or investment advisors to register with them, which information you can obtain through a public records request.  Check to see if the entity soliciting your investment is registered with the New York Department of State.  Failure to register should be added to your list of questions.  An incorporated entity likely has an operating agreement (an LLC in New York is required to adopt one), which you can ask for as part of your due diligence.

If you are investing in a product, check to see whether the entity soliciting your investment has a patent for the product.  Review the patent and/or consult with an experienced attorney to determine the scope of the patent.

3.     ASK QUESTIONS

You have had your initial meeting and done exhaustive homework on the investment opportunity.  By now you should have a thorough set of questions to which you can present to the investment promoter.  These questions may range from inquiries regarding the promoter’s background to requests for additional documentation to questions about the product or investment opportunity.  Many times these questions will beget additional questions or lead to additional homework.  That’s fine.  This is not a race.  We are talking about your hard earned cash.

The most important thing you can ask for are referrals.  Professional referrals and/or referrals to other prior or present investors.  These are the people who can give you the greatest insight into the “after” phase of the investment.  Your promoter may promise monthly updates.  Have they been doing so for other investors?  What do those updates consist of?  As mentioned above, a promoter often wants your money quickly and will be readily accessible during the solicitation phase.  If other investors indicate to you that a promoter’s behavior has changed post-investment, it’s a red flag.  Carefully ask the promoter why he/she hasn’t lived up to his/her promises to other investors.  You may have to ask questions that make you uncomfortable. That’s the only way to get answers to the most important questions.

Listen to the answers to your questions.  Try to understand them.  If you don’t understand, press harder.  Ask for corroboration (financial records, correspondence) when appropriate.

4.     GET A SECOND OPINION

Through your homework and careful questioning of the investment opportunity, you should have a fair amount of documentation and information.  Ask your attorney, accountant or financial advisor to take a close look at the assembled information.  If possible, have more than one of them look.  Spending a bit of money up front to get professional advice benefits you in the long run.  Ask each person who reviews the opportunity to assemble a list of questions for you to bring to the promoter.  Review the answers to your questions with them.  If they exercise caution, make sure you understand their reasons for doing so.  In the right situation, a risky investment may still be worth taking.  But make certain that you understand the scale of the risk you are taking on before you hand over a check.  Otherwise, you might as well turn over your money willy-nilly to the next person who calls you claiming to be IRS.

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