Becoming a victim of securities fraud is a serious and devastating matter. The market is known to fluctuate, and especially in light of the impact of COVID-19, you may not realize that it isn’t the economic roller coaster impacting the growth of your portfolio. It is easy to assume that you are too smart and cautious to become a victim, but the statistics are staggering. In 2015, more than 71,000 reports of fraud were reported to the United States Sentencing Commission. And in 2019, almost 200 federal class-actions lawsuits were filed that dealt with fraud-related activities. It is clear that investors are more at risk than ever before for losses due to fraud. Don’t become a victim; instead, consider these ways to avoid investment or securities fraud:
Thoroughly Question Your Stockbroker or Investment Advisor
Someone who is looking to defraud you will be counting on your to trust their expertise and not ask too many questions. They won’t contradict your statements or present you with hard and fast data for your portfolio choices. They will want you to blindly accept their advice and not push for more information. Always ask questions, not just about the stock market or the market trends, but about their success and experience in the investment field. No question is too dumb when it comes to your money. Ask things like: “Is this investment product registered with the SEC or my state securities agency?” or “How is this investment suited to match my investment goals?” Ask about the liquidity of the investment and what the potential risks may be on the investment. Remember, the investment advisor is working for you, not the other way around.
Conduct Your Own Research
Even though your advisor may present you with some good-sounding information, always do your own digging. Don’t just look at investment forums or the news release of a company. You need to go pull back the layers of the company and its products or services to see how sound the investment will be. The SEC offers the EDGAR filing system where you are able to check out a company’s financial statements. You want more than just one record year or quarter of earnings. You are looking for steady growth and products or leads that are following the market and consumer trends. Someone looking to defraud you may find a company that seems like a great investment at first glance, but at a deeper level, it will cost you your savings.
Check Up on the Salesperson
It doesn’t matter who recommended the individual to you or if you have already known them, always spend time looking into the background of the voice asking for your money. Those who have a license to the sell securities in your state should head to the top of the list, but you want more than just a license to operate. You want a history free from disciplinary actions or run-ins with other investors or regulators. Look at the firm they work for and check the history for it as well. The SEC and FINRA both have a free online database listing the disciplinary histories of advisors and brokers. According to securities fraud defense attorney Nick Oberheiden, you can also check the state-level securities regulator for information on a specific individual. Look past the smile and the promise of more money, and find out just who you will be working with.
Avoid Unsolicited Investment Offers
Many times, a fraudster will run a “pump and dump” scheme with special advertisements online or in emails about inside information that will have a positive quick return if you invest now. The promoters boost the price of the stock with so many extra investors buying up shares, but then dumps their own share of the holdings back onto the market, selling at a higher rate. Once the fraudsters stop hyping the stock, the price will fall and all the other investors lose their money. Foreign and off-shore investments should also be avoided since you will have a hard time finding out what happened to your money or where it was sent once it leaves your hands or a US bank. The Internet is full of opportunities for fraudsters, so be very cautious when you find advertisements or offers on social marketing or networking sites.
Know the Red Flags of Fraud
Financially intelligent people become the victims of fraud all the time because fraudsters are extremely good at what they do. They employ a range of persuasion techniques that are uniquely designed to appeal to the victim’s psychological profile. They will promise high yields for little investment, but these are often risky gambles. They use terms like “incredible gains” or “very little risk but huge upside.” These are classic signs of either outright fraud or extreme risk. Do your due diligence to compare the promised yield with what the current returns are showing on the stock indexes.
You will never find a “guaranteed return,” either. There is a degree of risk with every investment you make, always evident by the return you get or expect to receive. High returns carry higher risks, and in the wrong hands, potentially a total loss. Don’t think about what your life might be like if you did make all that money. The most successful investors play the long game.
When you do find yourself in an investment scheme, you need to hire a lawyer and prepare for a battle. Your investments may be lost, but you can still try to keep another investor from getting sucked into the same fate.
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