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Investor Education

Tips for Avoiding Investment Fraud

Spot the warning signs

Investment fraud criminals use a wide array of sophisticated and highly effective tactics to target and influence prospective victims. The truth is you encounter these tactics every day; they are used by legitimate businesses, in retail stores and in advertisements. Learning to recognize these tactics can help you avoid being a victim.

Other warning signs

Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way. All investments carry some degree of risk.

Unregistered products: Many investment scams involve unlicensed individuals selling unregistered securities—ranging from stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments, such as prime bank investments.

Overly consistent returns: Any investment that consistently goes up month after month—or that provides remarkably steady returns regardless of market conditions—should raise suspicions, especially during turbulent times. Even the most stable investments can experience hiccups once in a while.

Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success. Legitimate professionals should be able to explain clearly what they are doing. It is critical that you fully understand any investment you're seriously considering—including what it is, what the risks are and how the investment makes money.

Missing documentation: If someone tries to sell you a security with no documentation—that is, no prospectus in the case of a stock or mutual fund, and no offering circular in the case of a bond—they may be selling unregistered securities. The same is true of stocks without stock symbols.

Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error—or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets. For instance, is the investment adviser also the custodian of your assets? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts.

A pushy salesperson: No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you've got to "act now." If someone pressures you to decide on a stock sale or purchase, steer clear. Even if no fraud is taking place, this type of pressuring is inappropriate.

Strategies you can use

Here are three key strategies you—or anyone you know who fits the profile of a potential fraud target—can use to help distinguish good offers from bad ones:

  1. End the conversation: Practice saying "No." Simply tell the person, "I am sorry, I am not interested. Thank you." Or tell anyone who pressures you, "I never make investing decisions without first consulting with my ___. I will contact you if I am still interested." Fill in the blank with whomever you choose—your spouse, child, investment professional, attorney or accountant. Knowing your exit strategy in advance makes it easier to leave the conversation, even if the pressure starts rising.
  2. Turn the tables and ask questions: A legitimate investment professional must be properly licensed, and their firm must be registered with FINRA, the Securities and Exchange Commission, or a state securities regulator—depending on the type of business the firm conducts. In addition, with very few exceptions, companies must register their securities with the SEC before they can sell shares to the public.

    So, before you give out information about yourself, ask a few questions first:

    • To check out the seller, ask: Are you and your firm registered with FINRA? The SEC? A state securities regulator? If so, which one(s)?

      Verify the answers. Use FINRA BrokerCheck for access to the registration information for both FINRA- and SEC-registered investment professionals. You can also call the Wisconsin Division of Securities at (608)266-2139.

    • To check out the investment, ask: Is this investment registered with the SEC or the Wisconsin Division of Securities?
      Verify the answers. Check the SEC’s researching investments webpage to confirm what the salesperson tells you. You can also contact the Wisconsin Division of Securities.
  3. Get a second opinion: Be extremely skeptical if the person promoting the deal says, "Don't tell anyone else about this special deal!" A legitimate investment professional won't ask you to keep secrets. Even if the seller and the investment are registered, it's always a good idea to discuss these sorts of decisions with family or a trusted financial professional.

10 tips for avoiding investment fraud

Tip #1 - Check out the Person Offering Investment Deals:
Wisconsin law requires most securities and the people selling them to be registered by the state. Check them out with the Wisconsin Division of Securities BEFORE YOU INVEST by calling (608)266-2139.

Tip #2 - Beware of High-Pressure Tactics:
Say "no" to any person who pressures you to make an immediate investment decision. You need time to do your own research. Any ethical salesperson will understand this.

Tip #3 - Exercise Particular Caution if You Lack Financial Experience:
It's easy to feel intimidated and overwhelmed by complicated financial jargon. Ask lots of questions and insist that the salesperson explain the investment in every day language until you understand it. Protect yourself by educating yourself.

Tip #4 - Keep in Mind that Good Manners Don't Indicate Personal Integrity:
Con artists are generally extremely polite, knowing that many of us equate courtesy with personal integrity. Swindlers are also counting on your good manners to keep you from cutting them off. Don't let your good manners land you in trouble; simply hang up if you don't like the conversation.

Tip #5 - Watch Out for Salespeople Who Prey on Your Fears:
It is common for swindlers to pitch their schemes as a way to eliminate your financial fears of the future. Remember: fear and greed can cloud your good judgment.

Tip #6 - Exercise Particular Caution if You Are an Older Citizen:
The elderly, and particularly older women, are a frequent target of scam artists. Always seek the advice of a neutral party before investing.

Tip #7 - Monitor Your Investments and Ask Tough Questions:
Insist on regular written reports and look for signs of excessive or unauthorized trading of your account. Constant vigilance is a vital part of being an investor. If you suspect that something is amiss and you get unsatisfactory explanations after submitting a written complaint to the firm, contact the Division of Securities at DFISecurities@dfi.wisconsin.gov or 608-266-2139.

Tip #8 - Look Out for Trouble When Retrieving Your Principal or Cashing Out Profits:
If any person with whom you have invested stalls when you want to withdraw your money, you may have uncovered someone who is cheating you. If you are not investing in a fixed-term security, such as a bond, you should be able to receive your funds within a few days.

Tip #9 - Report Investment Fraud or Abuse Immediately, Despite any Embarrassment or Fear You May Feel:
If you suspect you have been victimized, call the Division of Securities at 608-266-2139. The sooner you report fraud, the better your chances of recovering some or all of your investment.

Tip #10 - Beware of "Reload" Scams:
Con artists often use investment losses to scare you into a second scam. To recoup their losses, victims sometimes invest in another scheme (a "reload") in which the con artist promises to make good the original loss - and may offer new, higher returns. Often, the result is only more losses.