Robbing Peter to Pay Paul

Protect yourself from Ponzis and other investment fraud

To make sure you don’t part with your money under fraudulent ploys, here are a few red flags to be aware of:

High Returns: Scammers will promise guaranteed returns higher than the current market. It used to be a 50% return. But in the current market, con artists are now promising a 10% to 15% return, says Joseph.

Low or No Risk: Every investment has risk. Generally speaking, the higher the yield, the greater the risk. Johnson warns it is not possible to get constant returns year after year on any investment. Some years you make money, and some years you lose money.

Urgency: Don’t be swayed by comments that you have to act now to make sure you can get in on the deal or that this is a once-in-a-lifetime opportunity, Johnson also cautions.

Limited Documentation: Fraudsters rely on the fact that many people simply don’t bother to investigate or ask for detailed information. Madoff was able to get away with his scheme because he didn’t have an independent auditor, Johnson says. Reports should be generated by a reputable outside firm.

Secrecy: Beware if you are sworn to secrecy about the investment. Joseph says con artists often paint securities regulators as the bad guys trying to keep investors from capitalizing on a good thing.

Always check to see if the investment is registered with the U.S. Securities & Exchange Commission or local Securities Division. Make sure the person selling or managing the investment is licensed with your state securities regulator. Also check with the Financial Industry Regulatory Authority. “Don’t give someone all of your money based purely on a sales pitch,” Johnson says.

Joseph adds that unfortunately “people want to believe that everything is going to work out, that they will get their money back, and that they haven’t been conned. They want to believe in the tooth fairy.”

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