Clever scams can snare unwary investor

By Nancy Schultz | Jul 14, 2009

Investment scams used to – and sometimes still do – arrive in the mail or over the telephone, but these days the typical scam artist is likely to attempt to attract investors through the Internet using e-mails, bogus online investment newsletters, message or bulletin boards, chat rooms – any inexpensive way to reach potential investors.

The exposure of some recent online investment schemes prompted me to alert you to the hazards of getting snared by these scams. There is no magic wand to help you avoid them, but applying common sense will likely steer you away from most fraudulent schemes. Here are some key points:

  • Think twice before you invest, always, no matter how attractive the idea seems.

  • Treat alluring e-mails the way you would treat unsolicited telephone calls. Ask yourself why an unknown person or company would be soliciting your interest.

  • Check online investment newsletters thoroughly. Fraudulent ones are often paid by companies to tout their stock and are not sources of unbiased information. Investigate independently any company that interests you, and be prepared to lose all your investment if you invest in small, thinly traded firms.

  • Beware of online bulletin or message boards. While most messages may be from real investors, you cannot be certain of anyone’s identity. Messages may be from company insiders or promoters paid to drum up interest in a thinly traded stock.

  • Spam e-mail has taken the place of the cold-calling telephone tipster who used to let potential investors in on a “hot tip” certain “to make you wealthy.” It is best to simply delete them; fraudulent schemes sometimes work because they appear legitimate. You might be taken to a sophisticated but bogus Web site that appears to provide factual information about a firm or an investment idea.

  • Finally, the old maxim that never goes out of style: if an idea seems too good to be true, it probably is. That offer of an incredibly high return probably isn’t going to happen. Instead, your cash could be going straight into the hands of someone like the California fraudster who, according to an SEC-documented case, collected $190,000 from 150 investors and instead of building his company, bought groceries and some really nice stereo equipment.

    There are measures you can take to avoid falling for schemes like those of a couple who promised to double investors’ money in four months. They collected $3.5 million by selling “prime bank” securities, the SEC reports – a “security” that doesn’t exist.

    If an investment idea does appeal to you, make sure you take measured steps to look into it. Get financial statements from the company, verify its claims, call suppliers or customers. Check the SEC’s EDGAR database of public companies (all U.S. companies with more than 500 investors and $10 million in net assets must be registered here, as must all firms listed on the major stock exchanges). Visit sec.gov for news of fraudulent schemes and how to deal with them. Check any broker’s disciplinary history on the NASD’s BrokerCheck Web site (or call 800-289-9999). There is considerable background information at this Web site: nasd.com/investorinformation/investoralerts/index.htm.
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