How to Protect Yourself From Investing Scams

investment scams
investment scams

Call it investor schizophrenia: On the one hand, the volatile stock market has some investors looking for "safety;" and on the other, stock market losses have led some to desperately seek fat returns elsewhere. Either way, you could wind up in trouble, because scam artists are ready to prey on the desires of both.

"It's not a matter of simply being greedy, but people are worried they won't have the assets they need when they retire, there is a certain amount of fear and desperation," says Michael Byrne, chief counsel of the Pennsylvania Securities Commission. Unfortunately, he says there is no shortage of scammers who "don't mind nailing widows and orphans."

It's estimated that $40 billion is lost per year to investment fraud, says Bob Webster, director of communications of the North American Securities Administrators Association. Seniors are often on top of target list.

The NASAA recently released its report, 2011 Top Investor Traps and Threats. Given the breadth and depth of the schemes it profiles, you really should be looking over your shoulder. That's not paranoia: It's prudence.

Here's how you can protect yourself.

Know Where Fraudsters Are Likely to Lurk.

"Fraud is always there," says Webster. "Con artists follow the headlines and tailor their pitches to exploit common fears and popular trends."

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"Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors," the NASAA's website reports. "Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully. Just like other securities, interests in real estate ventures also must be registered with state securities regulators."

"Everybody thinks that a load of property can be bought for next to nothing and that they can just flip the house. People are being told to put up money for distressed properties, but what's not being discussed is that there isn't a lot of buying now," says Byrne. "At least when you own stocks and bonds, you can sell [them] and limit your loss, but you don't have that kind of control with a hard asset like a house," says Byrne.

What Byrne sees as particularly dangerous, is the gold and precious metal scams. Higher precious metal prices and the promise of an ever-appreciating, "tangible" asset have lured unsuspecting investors into a variety of scams. According to NASAA's website:

Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases, reports NASAA. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver's value declined by 30 percent in a single three-week period.

In 2011 the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million, according to NASAA. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported "leverage" financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a "clearing firm." State and federal investigators found that the clearing firm delayed or ignored requests by investors to sell their precious metals investments. Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was purchased.

"People think gold and precious metals are the way to go in an uncertain market. They are looking for solidity, safety, but they don't realize the downside of gold," says Byrne. "You need a safe place to keep it. You can't keep it at home. Gold does not pay interest. You have to sell it to realize value," he points out. Then there are the bullion schemes. "You hand over your money and you're told that you own gold, and they say they will store the bullion in a vault. That often is a total scam. You have a piece of paper that says you have gold, but that gold frequently doesn't exist," says Byrne.

Beware the "Ground Floor"

Watch out for the "next big thing." Investors who chased tech stocks in the late 1990s got burned badly, as did those who bought expensive real estate in the mid 2000s, says Charles Sizemore, chief investment officer of Sizemore Capital Management. Today, it appears that the bubble mentality has moved to gold and precious metals. "This bubble is not likely to end any differently than the others," he says, "so investors beware!"

Energy is ripe for rip-offs too, warns the NASAA. Con artists "use high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs," it notes. Even when your energy investment is legit, know that there is a real chance you could lose all your money. "Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich," says the NASAA's website.

The pitch makes promises to get you in on the ground floor of a new investment or strategy with of course, great economic return. "Any investment offering requires careful research, and investors should always keep in mind the maxim that if it sounds too good to be true, it probably is," said Benette Zivley, the Texas Securities Commissioner, in a prepared statement.

And of course, those are just some of ways you can get snookered. The NASAA website details even more.

Four Ways to Protect Yourself

1. Keep your emotions in check. Don't try to hit a home run to try to play catch up for stock market losses. Avoid the temptation of a promise of a higher return than stocks, bonds or mutual funds. Independently verify any investment opportunity as well as the background of the person and company offering the investment. Your state securities regulators can provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered.

2. Ask yourself a few key questions. With any investment, you must consider these things, among others, says Byrne: What do you owe? What is the level of risk you're willing to take? What is your time horizon for the investment given your age, among other considerations?

Also: "Is the person and the organization registered to give advice? Is there any disciplinary action against the person or the organization? Has the person jumped around a lot?" These are just a few of the questions you need answers to, says Byrne.

3. Ask even more questions of the seller. Leslie Van Buskirk, attorney supervisor for the Division of Securities' Bureau of Enforcement in Wisconsin, offers a few insights on what to look out for. Is the seller relentless in pressuring you to invest? Do they refuse to provide written information about the investment? Do they tell you not to discuss the investment with anyone because it's part of a "secret program" only offered to select investors, or do they say that the return on investment is much higher than other similar products? Be wary, too, if what you're being told about how the investment works straight up makes little sense, or doesn't jibe with any written material you were given or have seen elsewhere. Any such scenarios should be enough to make you get up and go in the other direction.

4. Get a second opinion. So maybe the pitch sounds good. And let's assume you did some research. Now, go a step further, says Byrne: "Get somebody independent to evaluate the potential investment. Just like if you were diagnosed with a serious illness, you would get a second doctor's option. Do the same for somebody who's reaching for your purse, especially if you're older, [and] you have no time to make up losses."

Quite simply, says Sizemore, don't forget common sense: "Ignore the noise."