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.
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.”