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Don't get taken by investment fraud

Investment and Asset Management

Many legitimate investments are risky enough without investors getting involved in what may turn out to be fraud. Whether you’ve received an anonymous email about a “hot” stock or a tip about an “exclusive” real estate opportunity from someone you actually know, it’s important to remember the old axiom, “if it sounds too good to be true, it probably is.” Here’s how to steer clear of investment scams.

Stock Scams

One of the most popular investment scams is called “pump-and-dump.” Here’s how it works: A fraud perpetrator buys shares in an inexpensive, relatively illiquid publicly traded stock whose price is likely to react dramatically when trading volume increases. Then the crook makes false or misleading statements to encourage people to sink their savings into the stock and drive up its price. When it hits a certain dollar amount, the fraudster sells, locking in short-term gains before the stock price returns to a more realistic market price. Investors are left with what often are substantial losses.

In many cases, pump-and-dump schemes are perpetrated via email. So a simple way to prevent getting taken is to simply delete investment emails from anyone you don’t know and trust. If, however, you have reason to believe an investment is legitimate, determine whether it’s a good investment opportunity. Read publicly available reports and financial statements, review coverage by third-party analysts and news organizations, and note the  stock’s trading volume. The more thinly traded a stock, the greater the potential for fraudulent manipulation.

Business Built to Fail

Business opportunity scams can be relatively straightforward — for example, an offer to invest in a start-up that’s hyped as the “next big thing,” but is actually set up to fail. Or they can be complicated, such as pyramid schemes that offer no actual product or service and are sustained by constantly recruiting new “investors.” Pyramid schemes often call themselves “clubs” or “gift programs” and frequently are promoted on social media platforms. 

Whatever the opportunity, be skeptical and perform due diligence before investing.  Make sure you understand what  the business does and whether there’s a viable market for its products or services. Study disclosure documents, earnings claims and proposed contracts  and look for potential loopholes that might benefit the seller at  your expense. For instance, are start-up costs particularly high? If you’re required to buy inventory, does the seller agree to buy back unsold goods?

General Safeguards

With all potential investments, research the seller’s history and reputation online and check for complaints with the Better Business Bureau, your state’s attorney general’s office and the Federal Trade Commission. (Note, however, that the absence of complaints doesn’t necessarily mean the seller is aboveboard.) Also ask the seller for names and contact information of current investors or participants — and be sure to follow up with those individuals.

Important: Don’t assume that only strangers are dangerous. Among the thousands of victims of Bernie Madoff, perpetrator of the biggest Ponzi scheme in history, were many friends and family members. This isn’t unusual. It’s also possible that someone you know will unknowingly pass along a bad tip.

Important Takeaway

Finally, to avoid investment  scams talk to your Lenox advisor and attorney. An attorney should review any legal contract before you sign it. Your Lenox advisor can help you determine whether investments are legitimate and if they make sense given your financial resources, investment goals, risk tolerance and  other factors.