How to Avoid Being the Victim of Securities Fraud

The COVID-19 pandemic exacerbated the problem of investment scams and securities fraud[1], particularly when aimed at older adults[2]. There are many forms of investment fraud such as Ponzi schemes[3], promissory note fraud[4], romance fraud, real estate investment fraud, and other types of investment scams.

Although it does help to know the different types of investment scams that exist, particularly those targeting the elderly, it’s far easier to recognize the red flags that all of the most common investment scams share.

Promises of high returns that are “too good to be true”

Any investment that promises consistent high returns has strong chances of being a scam. This is particularly true of investments that promise returns in the long-term. Although high-risk investments do sometimes offer high returns in the short-term, this is more difficult to predict for long-term investments. Also, no investment under the sun can offer guaranteed high returns. The very nature of investing is that there is some risk involved. The only “guaranteed” returns you will ever get is from an interest-earning account, but usually the interest on such accounts is so low that it is not considered an investment at all.

Unregistered salespeople

If your financial adviser or broker is not registered with the SEC or with FINRA[5] then our advice is to stay away from any investments they “recommend.” Although there are some valid exceptions to advisers not being registered, these are extremely rare and never the case for advisers who deal with large sums of money. Yes, this is an oversimplified explanation, but the rule of thumb remains the same: deal only with SEC/FINRA registered and licensed advisers.

The National Adult Protective Services Association (NAPSA[6]) discovered that only 1 out of 3 investors ever checks the background of their financial adviser. If every investor did this, there would be a lot less investment fraud. You can check an adviser’s registration status and disciplinary background on FINRA’s BrokerCheck website. You can also check the SEC’s Investment Adviser Public Disclosure database[7].

“Free lunch/free dinner” seminars

“Free Lunch” seminars are exactly what they sound like—people (usually elderly) get invited to a free lunch or dinner, and are then told about some inappropriate investment opportunity. This sleazy tactic is so common that it has even merited a mention[8] on the NASAA (North American Securities Administrators Association) website.

Power of attorney and other signature swindles

Anyone requesting power of attorney (POA) should signal an enormous red flag. There is no reason whatsoever to hand over POA to anyone to invest in something.

Additionally, many swindlers trick elderly people into signing documents by:

• Placing one document over another so that the elderly person thinks they are signing one thing when they are in fact signing another.
• Signing a document that lacks all details which will be filled in later.

You should sign all documents without any pressure, and be given all the necessary time and privacy to do so without external coercion or anyone “breathing down your neck.” Ideally, you should run the document through a competent securities attorney[9] before signing it.

Overly complicated investment strategies

If an investment sounds too complicated and you can’t seem to get your head around it, skip it. Smokescreens of this nature are common in investment scams. Fraudsters give the impression that the details of the investment are “highly intricate” or “ingeniously planned” and that average investors couldn’t possibly understand them.

In order to comply with FINRA rules, your adviser is obliged to make investments understood by you.

Overly consistent returns

A cousin to the “too good to be true” point, investments with overly consistent returns are usually fraudulent. Investments go up and down according to market fluctuations. If the investment you are being told about seems to ride these fluctuations with gusto, never suffering a dip, then it’s probably a scam.

Ambiguous answers to your questions

Financial advisers are obliged to provide full and complete information regarding your money and investments. If the answers to your questions are ambiguous and do not leave you fully satisfied, walk away from the investment until you can receive answers to the questions you pose.

Ambiguous answers to questions about the investment often signal a fraudulent investment.

Offshore investments

Although offshore investments aren’t necessarily fraudulent, they do pose many potential risks for U.S. investors because they cannot be held to the same scrutiny by the SEC as local investment opportunities. If the investment you are being offered is an offshore one, find out if you can invest in a local arm of it which is registered and regulated by the SEC.

Payments not forthcoming

If you were expecting dividends or other payouts on a set schedule but have to fight for these or chase them up, it could be a sign that you have put your money into a fraudulent scheme. Put your grievances in writing to the company. If you do not receive an apt response and resolution, take the matter up with your attorney as soon as possible.

Pressure to invest

There should never be any pressure to invest in anything. Investors are free to put their money into whatever investments they choose. An adviser’s job is to lay out the facts and let the investor decide. “Hard sell” techniques and high-pressure sales methods are often a sign of a fraudulent investment.

Seeking help

Contact MDF Law

If you have been caught by an investment scam, we at MDF Law are very interested in hearing about it. Contact us[10] to let us know about your case.