Investor Protection

Avoiding Investor Fraud

There are several precautions that investors may take to reduce the possibility that they will become victims of investor fraud. Here are just a few:



Avoiding being hurt by a con artist is as easy as doing your homework -- before you invest.

  • Contact your state or provincial securities regulator to see if the investment vehicle and the person selling it are registered. Your state or provincial securities regulator will also be able to tell you if the salesperson has a disciplinary history, that is, whether any civil, criminal or administrative proceedings have been brought against him or her.
  • Contact your local Better Business Bureau to see if any complaints have been filed against the venture’s promoters or principals.
  • Deal only with financial advisers, broker-dealers or financial institutions having a proven track record.
  • Ask for written information on the investment product and the business. Such information, including financial data on the company and the risks involved in the investment, is contained in a prospectus. Read it carefully.
  • Don’t take everything you hear or read at face value. Ask questions if you don’t understand, and do some sleuthing for yourself. If you need help in evaluating the investment, go to someone independent whom you can trust such as an attorney or an accountant.
  • Steer clear of investments touted with no downside or risk.


Investing in securities is risky enough without worrying about whether your salesperson is going to fleece you. To be an informed investor, you must know what danger signs to look for. Some are subtle, and some are easier to spot.

Rule 1: Con Artists Like To Blend In

Con artists know that being themselves hurts business. Effective con artists must disguise their true motives. Whether your first contact with the con artist is through an unsolicited telephone call or a stranger ringing your doorbell or sending you an email, the con artist takes great pains to look and sound familiar. Often, con artists like to blend in with others in your group whether that group be political, community (such as the local senior center), religious or other. They quickly get to know a lot of people in the group so they can count on this common bond to spread the word about their questionable investments and reel in unsuspecting investors.

Rule 2: Con Artists Dress For Success

Even though con artists would like you to believe that they are "just plain folk," they are smart enough to realize that this alone will not sway you to part with your money. They work very hard to come across as smooth, professional and successful. Con artists may dress like they are wealthy and work out of impressive looking offices. If your only contact is by mail, the office may bear a prestigious sounding address. Often, this is nothing more than a mail drop. Your best bet is to look behind the surface and do some serious investigating before you part with your money.

Rule 3: Con Artists Often Push Poorly Understood or Little-Known Products

Today, a variety of institutions, from banks to brokerage firms to financial planners, offer a wide range of financial products. With such a confusing mix to choose from, it is no wonder that many people turn to financial advisers for guidance. Con artists know this and stand ready to assume full responsibility for your investment decisions. Don’t let them! When it comes to your money, think things through for yourself after getting all the facts. Never give someone control over your purse strings just because you think you are too old, young or financially inexperienced. If you really need help, only deal with financial advisers, broker-dealers or financial institutions with proven track records.

Rule 4: Con Artists Bring Out The Worst In You

Skilled con artists can bring out your worst traits, particularly greed, fear, and insecurity. Con artists know that promises of huge returns with no risk will get your attention. They hope that it will get your money too. Fear comes into play when the con artist warns you that complaining about a failed investment to the government may result in your spoiling it for others or "rocking the boat." Con artists try to make you feel inadequate if you don’t believe them or ask too many questions. If you find yourself making investment-related decisions based only on your emotions, watch out!

Rule 5: Con Artists Are Fair Weather Friends

Before you invest, con artists are very friendly. They take a personal interest in you out of the blue. They call back when they promised they would. Each time, they tell you even more good things about the investment. You may feel you’re being pressured into investing. You are. Despite his or her kind words, the con artist will do anything in his or her power to make a sale. Too often, however, once you have invested your money, contact with the con artist dwindles and then stops altogether. If you cannot get answers to your questions after handing over your cash, there is a good chance someone else is getting rich off of your investment.

Rule 6: For Every Silver Lining, There Is A Cloud

Every investment involves risk. But to hear the con artist explain it, the investment may be too good to be true. Trust your inner voice if you hear claims like these:

  • "I just got a hot tip from an inside source that this stock will go through the roof."
  • "Your return is guaranteed. There’s no way you can lose money."
  • "Gotta get in on the ground floor now or you’ll be left out in the cold. In fact, we’ll send a messenger over tomorrow to pick up your check." (Con artists often use this device to avoid federal mail fraud charges.)
  • "This deal is so great, I invested in it myself."
  • "If this doesn’t perform as I just said, we’ll refund your money no questions asked."
  • "Everyone else that invested in this did very well."

Be especially careful if the salesperson downplays any downside or denies that risk exists. Con artists usually are not very good at answering important questions. Watch out if the salesperson is reluctant to provide information on the following:

  • The background, educational history and work experience of the deal's promoters, principals or general partners;
  • Information on whether your investment monies will be segregated from other funds available to the business;
  • Written information on the business' financial condition, such as a balance sheet and bank references;
  • The prior track record of the business and its principals;
  • The salesperson’s name, where he or she is calling from, who he or she works for, his or her background and what commission or other compensation he or she will receive;
  • The salesperson’s connection with the venture and any affiliates

In addition, be wary if the salesperson doesn’t ask you questions about your past investment experience and your ability to withstand risk. Even if the salesperson does ask a few related questions, take heed if you get the sense that he or she is merely going through the motions.

Rule 7: Don't be afraid to "sleep on it."

If you are promised high, guaranteed profits and given no written explanation concerning the investment vehicle, the promoter’s background or the risks involved, walk away. Never invest in anything based on the enthusiasm or charisma of the salesperson -- they may have more to gain by taking your money than you know.


Affinity Fraud. Con artists frequently target members of closely knit religious, political, or ethnic groups. Their pitch is essentially, "since I am like you and believe like you, you can believe in me and in what I say." When an investment is presented in this context, the potential investor should be extremely wary. This pitch seeks to substitute an emotional appeal for careful analysis and critical thought.

Churning. An abusive sales practice in which unethical securities professionals make unnecessary and/or excessive trades in order to generate commissions. Most churning occurs where a broker has discretion to trade the account. In such cases, it is not necessary that the broker receive prior approval from the client to complete a transaction. Equity Indexed Certificates of Deposit. Remember the days of FDIC-insured, bank-issued certificates of deposit with guaranteed principal and interest? Equity Indexed CDs are not the same product. These hybrid securities products offer an interest coupon payment or return that is based on a stock market index, usually the S&P 500. Returns are not FDIC insured. They are dependent on the performance of the stock market. These are complex securities that promise a rate of return calculated over a defined period of time based upon some form of securities market index. A declining stock market means the possibility of no return on your investment. As a result, these products pose liquidity problems and are therefore, not suitable for seniors who may need the money for retirement living.

Oil and Gas Investment Fraud. High oil prices mean oil and gas scams will continue to attract victims. Oil and gas deals are complicated investments that generally require a significant investment, often requiring a minimum deposit of thousands of dollars. Increasingly, these deals are being promoted via the Internet with claims of attractive tax advantages. Sales materials with "official-looking" surveyor maps and "geologist" opinion letters touting the likelihood that the "managers" of the drilling enterprise will hit pay dirt are sent regularly to prospective investors more than 1,000 miles from the region being "prospected." Overall, these deals are highly risky, but the lure of high profits often proves irresistible to investors.

Personal Information Scams. The first step in separating a victim from his or her money is convincing the victim to divulge personal financial information. When the sales agent is a local tax preparer or unaffiliated insurance agent, he or she enjoys a position of trust in the community. Con artists not enjoying such a position of trust frequently style themselves as "senior specialists" or adopt a pretext of preparing "living will" or a "living trust." A pretext that is of current concern to insurance and securities regulators is the offer to help senior citizens qualify for prescription benefits by preparing forms. In the guise of filling out forms, the scamster may ask unnecessary questions about personal financial assets. To the con artist, this information provides a comprehensive laundry list of what is available for the taking.

Prime Bank Schemes. These schemes often promise high-yield, tax-free returns that are said to result from "off-shore trades of bank debentures." Investors are told that only very wealthy people can get the benefit of these programs but the promoter is able to make it available to the victim. Sometimes the victim is required to execute a "confidentiality agreement" in order to invest and is told not to consult an attorney, accountant or financial planner because they keep these programs for the "big boys" and will deny that they exist. There are no such programs, no such debentures and no such high-yield trades. These prime bank schemes are the securities equivalent of a purse snatch. Once the seller has your money, it's gone "off shore" forever.

Pump and Dump Schemes. Unethical broker-dealers frequently "pump" up the value of low-priced securities traded on the NASDAQ "pink sheets" and then "dump" the stock after naïve investors have purchased the stock at inflated prices. The balloon breaks when the promoters no longer maintain the myth that there is value in the shares and investors are left holding worthless shares. These schemes frequently appear through unsolicited e-mail messages.

Recovery Rooms. Scam artists buy and sell the names and financial information of victims who have lost money to "recovery room" operators who promise, in return for a fee that the victim must pay in advance, to recover the money lost in a worthless investment. These "sucker lists" are bought by crooks who know that people who have been deceived once are vulnerable to additional scams; especially scams that give hope of recovering lost money. If you have been the victim of a fraud, never give out your credit card or other personal information to someone who contacts you with a promise to recover your money. Remember, in the scam world this caller is known as a "reloader" and he is setting you up for a second bite at the apple.

Registered High-Interest Promissory Notes Publicly Advertised. Generally, the higher the return promised, the greater the risk to your money. A track record of paying high interest and repaying principal is not an assurance that you will get your money back if the company fails. These notes are not suitable for retirement funds.

Sale and Leaseback Contracts. In an attempt to avoid the investor protections of securities laws, some investments are structured to resemble the sale of a piece of equipment such as a payphone, ATM machine or Internet booth located at a remote venue where the investor cannot service and maintain the equipment and must enter into a servicing agreement. In order to make the deal more attractive, investors are told that after a given period the equipment can be sold back to the seller at the investor's original purchase price. The investor is also promised a specific rate of return. In a variant of this scheme, a real estate interest such as a long-term lease in a resort community is sold instead of physical equipment. Frequently the equipment or property does not exist and the seller lacks the financial capacity to keep the promise of repurchase.

Self-Directed Pension Plans. Many types of securities fraud require the victim to remove funds from legitimate investments such as stock brokerage accounts, mutual funds, insurance policies, deferred compensation plans and mutual funds so that they can be invested in a worthless scam. This scam may begin with advice to convert an employer-sponsored pension into a self-directed pension plan. While these plans may serve legitimate investment purposes, all too often they only serve to benefit the scam artist.

Unsuitable Recommendations. Just as every investor is different, so too are investments. What may be a suitable investment for one investor may not be right for another. Securities professionals must know their customers' financial situation and only make recommendations of financial products that they have reason to believe are suitable for the customer. When financial professionals fail to live up to applicable ethical standards, great harm can be done to individual investors. Variable annuities are tax-deferred investments that include insurance features and services. These products typically place mutual funds inside of an insurance wrapper for tax deferred potential investment growth. While these products are legitimate, regulators are concerned about their popularity in the sales community. Commissions to those who sell variable annuities are high, which could provide an incentive for sellers to engage in inappropriate sales. Variable annuities should only be considered by investors that understand the purpose and features of the product including penalties for early withdrawals that may make them unsuitable for short-term investors.