Top 26 Warning Signs of Investment Fraud You Should Know (2024)

How To Uncover Even The Best Disguised Investment Fraud Before It Costs You Money.

You can't judge a book by its cover.

Appearances can deceive when trying to protect yourself from investment fraud.

Sharp looking companies with trustworthy facades are used by con-men to instill confidence in their victims.

Rented office spaces, receptionists, professionally designed brochures, impressive web sites, and more, are all tools used to create the appearance of legitimacy.

That's because the con artist knows he must gain your trust to get your money so he will do everything necessary to appear reputable.

For that reason, you must let go of any preconceived notions or Hollywood expectations about how a con-man should appear. He could be a friend-of-a-friend, a kind voice on the phone, an authority figure on the internet, or a business person in a perfectly tailored suit.

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Additionally, the con artist can use any of the traditional communication channels to commit investment fraud. Besides the telephone, mail, and internet, investment fraudsters may advertise in well-known publications to appear legitimate.

Just because you learn about an investment through a reputable channel does not imply the investment itself is legitimate.

You also can't trust an investment just because someone you know made big profits. Con artists will often pay the first few investors large returns so that they will refer the investment to their friends.

Many investment frauds spread like a virus because self-deceived investors “talk up” their great returns at social gatherings. Don't be deceived.

“Never value the valueless. The trick is to know how to recognize it.”– Sidney Madwed

The reality is investment fraud can look perfectly legitimate in all the ordinary ways which begs the question, “How can I protect myself from investment fraud, and what are the tell-tale warning signs to tip me off before I lose money?”

To answer that question, below are the top 26 most common symptoms of potential investment fraud.

When you notice any of these warning signs, always remember that it doesn't necessarily mean you're faced with investment fraud; however, it should put you on notice to be extra skeptical and perform more detailed due diligence than normal.

Remember, a dollar saved is a dollar earned.

Top 26 Danger Signs of Investment Fraud:

1. Be skeptical of unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers offering investments.
2. Never trust anyone who promises a high return in a short period of time. Above market return is the number one characteristic of investment fraud. It's the bait designed to hook you.
3. Low risk, no risk, or a guarantee is the second most common characteristic of investment fraud. Watch out for track records so consistent they appear almost guaranteed. The truth is, every investment strategy has an Achilles Heel, making “no risk” incongruent with reality. The more you are guaranteed, the more you should examine what you are being guaranteed against.
4. Your investment account should be held with an independent, third party custodian that is regulated and monitored by regulatory agencies. Avoid giving custody and possession of invested capital to the investment manager.
5. Your investment account should be held separately in your name by the third party custodian. Avoid commingling or aggregating your assets into a pool with other investors.

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6. Hang up or walk away from high pressure sales tactics. When a salesperson demands you invest on the spot that is a red flag. If the salesperson is trying to make you feel guilty, stupid, or intimidate you into making a decision, then leave immediately. Investments must be understood fully before accepting risk. Legitimate investments that are good today are still good tomorrow. Never tolerate sales pressure when investing.
7. Beware of a broker who has “special connections”, “secrets”, or “inside” information not available to the general public. Making money on inside information is illegal, and there are no “secrets” to good investing.
8. Beware of invitations to join exclusive investment organizations and become part of a select group of active investors and financial experts. Exclusivity often points to potential investment fraud.

9. Be careful of opportunities to get in on the ground floor of the “next big thing” or “once in a lifetime” deal. Similarly, claims of unverifiable formulas, patents or new technologies that will revolutionize the industry are a warning sign that necessitates deeper due diligence.
10. Think twice about investment strategies explained with sophisticated terminology and fancy phraseology instead of commonly used words. A legitimate salesperson will simplify the complex to help you understand. Investment fraud may complicate the simple in order to intimidate you from looking deeper behind the facade. Never buy into the idea that you are too old, young, or financially inexperienced to understand an investment. If you don't understand, it then don't invest in it.
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11. Watch out for sophisticated investments marketed to unsophisticated, smaller investors (under $100K initial investment). If the risk/return was legitimate, the organizer could access all the money he needed from institutional investors at a much lower cost, and with far fewer headaches. The reason unsophisticated investors are targeted for investment fraud is because they rarely perform due diligence, whereas sophisticated investors always perform due diligence.
12. Beware of any investment offered from an overseas location.
13. Think twice when the sales appeal includes rhetoric about how the U.S. Government is keeping these investments away from the little guy so that it can be the secret of the rich. Conspiracy theories about the government and “secrets of the rich” are a warning sign of potential investment fraud.
14. Be wary of seminars and salespeople representing schemes to defer or hide money from the U.S. Government in tax shelters, trusts, or offshore accounts.
15. Be cautious of any investment without a prospectus or offering memorandum. Walk away from any salesperson who dismisses the importance of disclosure documents required by law as mere “formalities”.
16. Watch out for any investment that cannot be verified through the Securities and Exchange Commission (SEC), your state securities regulator, or the National Association of Securities Dealers (NASD) registration process.

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17. Be extra careful of any investment sold by people unregistered or unlicensed to sell securities, or those working for an unregistered or unlicensed firm. Certain independent insurance agents are a common example. Similarly, verify all registrations with regulators when dealing with unfamiliar persons or companies.
18. Be wary of any investment salesperson who doesn't want you to get a second opinion.
19. Walk the other way when an investment salesperson encourages you to invest on the basis of trust. Similarly, be careful of promoters preying on your membership in a certain group (church, professional organization, social club, etc.) to establish trust with you.
20. Watch out if you have trouble cashing out. Delays when withdrawing money may point to illegitimacy. Only fixed-term securities such as CDs, hedge funds with periodic redemption rights, certain partnership interests, and other liquidity constraints agreed to in writing prior to investing should limit your ability to access your cash when it comes time to exit.
21. Beware of any investment salesperson that encourages you to put your life savings into a single investment. Such practices are contrary to a prudent investment strategy. Similarly, no legitimate investment salesperson should ever fail to clarify your past investment experience and risk tolerance before recommending an investment. A con-man may skip this essential step in the sales process.

“A danger foreseen is half-avoided.” Cheyenne Proverb

22. Be skeptical of newsletters touting investments that don't specifically disclose who pays them, the amount paid, and the type of payment for promoting any specific investment. The disclosure should be prominently placed in the article and not buried in fine print elsewhere in the newsletter. Financial Mentor never touts any specific securities or investments in its newsletter, web site, or publications. Mixing investment advice with financial education is a conflict of interest.
23. Be wary if the salesperson encourages you to borrow money or cash in your retirement accounts to make the investment.
24. Never invest if the salesperson encourages you to falsify information on your account application.
25. Avoid investments where the salesperson requests your bank account number, and other unnecessary personal information, so he can “facilitate the transaction”. Additionally, you should not send money to a post office box, and if the salesperson offers to send a personal courier to pick up the check, it may very well be to avoid Federal mail fraud charges.
26. Watch out for investments accompanied by unprofessional contracts. Misspellings, careless wording, and vague or imprecise language in the agreement can point to more serious problems with the investment.

Five “Easy to Remember” Principles Of Investment Fraud

If the top 26 danger signs are too hard to remember, then rest assured there's a simpler way. Nearly all of the 26 symptoms can be reduced to five broad principles that are easier for your brain to retain.

Whew!

Because most investment fraud follows a proven formula to separate you from your money, it's pretty hard to sell a fraud without invoking one of the following four principles:

1. Sales Appeal: The hook designed to lure you in is get rich quick without risk or hard work. Above market returns, guarantees, low or no risk, and no effort required are all hallmarks of investment fraud. Investment fraud intentionally appeals to the basic human emotions of fear, greed, and wanting something for nothing, so that you'll make an irrational decision. Be wary of any salesman who draws out your emotions as part of the sales process. Due diligence is how you remove the emotion and base your decision on facts.

“Let the fear of danger be a spur to prevent it; he that fears not, gives advantage to the danger.”– Francis Quarles

2. Obfuscation and Misinformation: Fancy words and successful images are designed to win your trust by creating a façade of sophistication. Techno-babble is designed to intimidate you into not looking behind the façade. Multiple postings on the internet under various aliases are designed to create the appearance of many people involved. Professional images are designed to create trust. Always ask, “Where's the beef?” Never trust the façade, but instead look deeper to find real substance. Due diligence is how you look behind the veneer of obfuscation and misinformation to see if there is any real meat.
3. Unverifiable Claims: Secrets of the rich, technological breakthroughs, patent pending formulas, government conspiracy theories, and inside information are all examples of things that are either hard to verify, or not verifiable at all. Never invest based on hollow words alone. Verify all statements and claims with independent third party information. Assume nothing is true until confirmed through due diligence.

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4. Manipulative Sales Practices: Intimidation, inadequate disclosures, non-traditional payment choices, inadequate diversification or improper asset allocation, encouraging you to invest based on trust, or rushing you into a decision with high pressure sales tactics are all examples of manipulative investment sales practices that deviate from proven professional standards of conduct. Never rush a decision or invest based on emotion. Due diligence will slow down the sales process sufficiently to offset manipulative practices.
5. Lack Of Transparency: All investment accounts should be registered separately in your name with an independent, third-party custodian. All transactions in your investment accounts should be fully visible to you on a daily basis either through independent account statements, or the custodian's web site. Avoid commingled, pooled funds where the manager has custody and possession, and/or account activity statements are generated only by the manager, and not by an independent third-party.

Your job is to make life difficult for con artists by investigating all investments thoroughly, educating yourself about fraud, and reporting any suspicious activities to regulators.

Due diligence is your antidote to the manipulative and deceitful sales practices used to commit investment fraud.

Always remember that it's usually easy to invest in a fraud, but it's far more difficult to get your money back out. Walk carefully and cautiously by completing your due diligence before ever committing a dime.

Forewarned is forearmed.