An irreverent Wall Street Blog
by Bill Singer

The Consumer Anti Fraud Checklist

July 25, 2013

Much of what I do for a living is in the way of an autopsy. Defrauded investors contact me with their tales of woe and we then try to figure out whether they have been defrauded or merely made a bad investment.  Sadly, with far too many cases involving investor fraud, I see all sorts of warning signs and red flags that should have prompted the victim to ask more questions (or at least some questions)/ With the 20/20 vision of hindsight, even the victim often admits that the decision to invest was imprudent.  Of course, a hallmark of a truly adroit fraudster is to take advantage of his victims by preying upon their vanity and willingness to believe in something that is too good to be true.

The Securities and Exchange Commission recently published an Investor Alert in which the federal regulator set forth an excellent checklist of investment fraud warning signs.  I reprint that valuable guide below;

Common Red Flags of Fraud

Many Ponzi schemes share common characteristics. Following are some red flags:

High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. "Guaranteed" investment returns or promises of high returns for little risk should be viewed skeptically.

Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that generates consistent returns regardless of overall market conditions.

Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state securities regulators.

Unlicensed sellers. Federal and state securities laws require certain investment professionals and their firms to be licensed or registered. Many Ponzi schemes involve unlicensed individuals or unregistered firms. Secretive and/or complex strategies and fee structures. It is a good rule of thumb to avoid investments you don't understand or for which you can't get complete information.

No minimum investor qualifications. Most legitimate private investment opportunities require you to be an accredited investor. You should be highly skeptical of investment opportunities that do not ask about your salary or net worth.

Issues with paperwork. Be skeptical of excuses regarding why you can't review information about the investment in writing. Always read and carefully consider an investment's prospectus or disclosure statement before investing. Be on the lookout for errors in account statements which may be a sign of fraudulent activity.

Difficulty receiving payments. Be suspicious if you don't receive a payment or have difficulty cashing out your investment. Ponzi scheme organizers some-times encourage participants to "roll over" promised payments by offering higher investment returns.

It comes through someone with a shared affinity. Fraudsters often exploit the trust derived from being members of a group that shares an affinity, such as a national, ethnic or religious affiliation. sometimes, respected leaders or prominent members may be enlisted, knowingly or unknowingly, to spread the word about the "investment."

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