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Are You a Sitting Duck for Investment Fraud?


Investment fraud isn’t new, but it is a growing problem. In fact, according to the AARP Investment Fraud Vulnerability Study, the U.S. Securities and Exchange Commission has increased the number of investment fraud prosecutions they bring by approximately 15% per year since 2014. The Commodity Future Trading Commission has likewise reported a huge increase in the number of enforcement actions it has taken, imposing a record $3.14 billion in civil monetary penalties in 2015 alone.

It’s one thing to wave a big stick, but so-called cops on the case is just part of the solution, contends the report. Education and prevention is key. The report notes that there’s plenty of research that shows the typical victims are older men, more financially literate, more educated, have higher incomes and are more open to sales situations than the general public. They are also more likely to express an interest investments promoted by persuasion tactics by swindlers and con men.

The bigger issue is why folks fall prey to scammers in the first place. The study looked at just that. Researchers found that individuals who were victims of investment fraud “have a way of looking at the world of investing that makes them more vulnerable than others.” For one thing, of the 1,028 polled, more victims reported valuing wealth accumulation as a measure of success in life, and were open to sales pitches, taking risks and preferring unregulated investments. Sixty percent of the victims agreed with the statement, “some of the most important achievements in life include acquiring money,” compared to 41% of general investors. Also of note, 48% of victims said, “I don’t mind taking chances with my money, as long as I think there’s a chance it might pay off,” whereas just 30% of general investors said this. Another notable difference was in openness to sales pitches. Forty percent of victims said, “I like to keep my ears and eyes open for emerging investments and opportunities that no one has heard about yet,” compared to 30% of general investors.

“While I don't profess to be a psychologist, there is a lot of psychology behind it.  When a victim starts out with a Ponzi scheme, they get paid and usually for quite some time.  These payments create a confirmation bias in the investment.  It allows the victim to ignore common sense and red flags.  When the payments lessen or all together stop, the victims may not realize that they've been scammed.  Since they've been paid for so long, their confirmation bias leads them to believe that this is just a minor hiccup and things will get back to normal.  They will believe all of the lies because it confirms what they believe,” explains attorney Jef Henninger.

A financial adviser or broker should only have access to your funds in order to manage them, not to control them. They shouldn’t be able to withdraw funds without your consent. And they should never have the ability to move funds without your awareness.

For the same reason, he says, it’s easy to attract new victims.  “The person running it can point to other people that are doing well with the investment.  Sure, call John Doe, he'll tell you he gets his check every month.  He is making 15% a year every year.  And if you call John Doe, he'll happily confirm that information.  So again, you ignore common sense and the red flags and you invest.“

It’s not just psychological mindset that plays a factor in becoming a victim, but behavior. More victims reported being targeted by phone calls and emails from brokers wanting to sell them investments, making five or more investment decisions each year, and making remote investments that involved responding to sales pitches over the phone, over email, or in response to a television commercial. Demographics are important too. More victims were over 70, 50%, compared to general investors, 35%. They were likely to be male, married and veterans.

Investment fraud is expensive for the victims. In an age where traditional pensions have gone the way of the dinosaur and many people are in charge of making their own investment decisions for retirement and other purposes, knowing how to stay one step ahead of crooks is critical.

Here’s how to protect yourself.

Be mindful of who manages your money

“Bernie Madoff was a financial adviser who got away with his fraud because he controlled his clients’ assets and falsified the documentation. If you invest with a financial advisor that generates his own statements, you are at risk.,” says Robert Sicilliano, author of 99 Things You Wish You Knew Before Your Identity Was Stolen.

A financial adviser or broker should only have access to your funds in order to manage them, not to control them. They shouldn’t be able to withdraw funds without your consent. And they should never have the ability to move funds without your awareness, he says.

Reputation counts. Deal with financial advisors, broker-dealers or financial institutions with a proven track record. You can contact your state or provincial securities regulator to see if the investment vehicle and the person selling are registered.

Pay attention to red flags

If an advisor is gung-ho about an investment that he or she claims has no downside risks, end the conversation. All investments have some measure of risk.

Ken Springer, president of Corporate Resolutions and former special agent for the FBI, says to think twice about an advisor who talks about how great they are, name drops, has limited references, a vague resume and evasive answers to your questions.

“Ask direct questions about their track record and reputation. Have them complete an in-depth questionnaire, conduct a comprehensive background investigation to include both traditional and social media and do reference checks,” says Springer.

Beware the enemy you know

Springer says affinity fraud seems to be growing at a very rapid rate. “We’ve been seeing a number of frauds recently involving people who gained the trust of their fellow parishioners, hobbyists, even former teammates. People need to understand, that just because you have something in common with someone, that doesn’t mean they’re more trustworthy than anyone else.”

An Observer
An Observer   |     |   Comment #1
Unfortunately, a bigger problem than out-right fraud are investment vehicles that barely make it pass the sniff test, including but limited to: fixed indexed annuities, non-traded REITS, a concoction of indexed whole life policies and online (and offline) trading and real estate investment mentoring. These are poorly understood and often deceptively explained. Rock bottom interest rates, poor retirement planning and the boomer demographic have made such investment “opportunities” very saleable.
Overwhelmed   |     |   Comment #2
Excellent article Ms. Nance-Nash, THANK YOU! I guess sometimes "greed" causes to bump into fraudulent or simply bad investments? They say "It's better one bird in the hands than 100 flying!!!

I never used a financial advisor, just searched and researched VERY CAREFULLY for the highest interests among simple CDs, simple CD-type annuities and triple-tax-free muni bonds which self-reinvest. The returns were very good though not spectacular and never had problems with them and indeed it saved me thousands in taxes until I withdrew on maturities.

The only incorrect thing is I didn’t use my brains to calculate the spacing between them and as a result I’m having 2 annuities and one munibond in this very year all between 2 months of each other and amounting to around $400K... :( Maybe at this point I should seek consultation with an advisor?
!!!   |     |   Comment #4
In some cases it may be greed? However I think most people seek out professional financial advisors/planners because wanted "expert" financial advice. Unfortunately there are to many people out there without any scruples or conscience just waiting to take advantage of them.
Bozo   |     |   Comment #5
Do you really need a financial advisor? This is the preliminary question. Ironically enough, the State of North Carolina has recently answered this question (through its State Treasurer) with an unqualified "NO". One might say the North Carolina Treasurer is an indexer. As a CPA, he did the math. The State pension funds could do ever so much better, thank you very much, by eliminating investment fees and just "taking what the market index funds provide".
!!!   |     |   Comment #6
Big difference between government entities and the average wage earner hoping to retire without major financial worries. Not even a close comparison.
LuvCD   |     |   Comment #7
Bozo, on the "check" being sent incorrectly on the Forum post...it wasn't clear completely to me as to who the check was payable to AND if that same person/entity endorsed the check...that was my read of the issue. Hence improperly endorsed is slam dunk against issuing bank! Forgery by second bank is also a regulatory issue AND a felony
Bozo   |     |   Comment #10
LuvCD, I was merely trying to point out the easiest route is the quickest (and cheapest). Chase has the funds, improperly. The OP in the forum essentially stated they admitted that. That's conversion. It's quite easy to prove, small claims court is an easy remedy. I was just trying to be helpful.

All one needs to prove in a conversion action is (a) what you have is mine, not yours; (b) I told you it was mine, and to return it; and (c) you refused to do so, and continue to do so.

No need to allege forgery, or negligence, or associated malfeasance. No need to involve the State AG or the Feds. Just pull up a small claims court complaint on the web, fill it out, enclose the rather modest filing fee, then effect service. Service of a small claims action in most states is usually very simple; mail service, return-receipt-requested (or certified mail) suffices. The Court will assign a date and time for the matter. No lawyers need be involved (indeed, in many states, lawyers are precluded, so as to level the playing field)..

As a practical matter, any bank electing to contest the OP's fact pattern would be ill-advised.
LuvCD   |     |   Comment #11
Chase having the funds is, as you noted, but the original bank is the wrong doer, too, for improper endorsement. Conversion of whose funds? First bank since they are out the $s, not the customer?
Bozo   |     |   Comment #12
LuvCD, the "converter" is the entity holding the funds. The OP is out the funds. Whether the originating bank messed up is very fact-based, and might be hard to prove. Appreciate the issue I raised over on the forum. Most bank customers have mandatory binding arbitration clauses. To initiate an action against one's own bank is both costly and time-consuming. That's why I would focus on Chase, not BB&T.
LuvCD   |     |   Comment #13
An option!
deplorable 1
deplorable 1   |     |   Comment #8
I do my own investing and manage my own money. I don't trust any financial advisers or brokers. I use a discount online brokerage for all my trading. The only person who cares about your money is you so get educated and do your own investing this way nobody can ever scam you.
deplorable 1
deplorable 1   |     |   Comment #9
Here are some other investing tips:
1. Don't buy annuities unless you read and fully comprehend all the fine print(fees, loads, surrender charges and all). Oh and don't expect the shady salesman who is pushing them on you to point any of this out as they want to make a commission off of you the sucker.
2. If it sounds too good to be true it is.
3. If it doesn't pay a dividend don't buy it.
4. Stop trying to chase the next big thing to double your money and focus on dividend paying stocks. Slow and steady wins the race and pigs get slaughtered.
Bozo   |     |   Comment #16
Deplorable, another hint. Affinity group fraud. After all, this is what made Bernie Madoff. We tend to trust those in our "tribe", our affinity group. One assumes a member of our tribe would never deceive. That's the hook. After all, "trust" is wired into our genes. Our ancestors relied on trust to ward off enemies; the "tribe" would look out for its own.

Example: the most elemental "tribe" is the family. Who would ever suspect a family member of fraud? That said, stories abound. Regrettably, elder abuse is all too common in families.
john   |     |   Comment #14
just dont be a greedy idiot, never put your money in someone else hand
john   |     |   Comment #15
stay away from pnc bank

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