Common Red Flags For Fraud
To stay on guard and avoid becoming drawn into a scam, look for the warning signs of investment fraud:
- High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. “Guaranteed” investment returns or promises of high returns for little risk should be viewed sceptically.
- Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that generates consistent returns regardless of overall market conditions.
- Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the FSC or other regulators.
- Unlicensed sellers. Federal and state securities laws require certain investment professionals and their firms to be licensed or registered. Many Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive and/or complex strategies and fee structures. It is a good rule of thumb to avoid investments you don’t understand or for which you can’t get complete information.
- No minimum investor qualifications. Most legitimate private investment opportunities require you to be an accredited investor. You should be highly sceptical of investment opportunities that do not ask about your salary or net worth.
- Issues with paperwork. Be sceptical of excuses regarding why you can’t review information about the investment in writing. Always read and carefully consider an investment’s prospectus or disclosure statement before investing. Be on the lookout for errors in account statements which may be a sign of fraudulent activity.
- Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Ponzi scheme organizers sometimes encourage participants to “roll over” promised payments by offering higher investment returns.
- Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error—or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets. For instance, is the investment adviser also the custodian of your assets? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts.
- It comes through someone with a shared affinity. Fraudsters often exploit the trust derived from being members of a group that shares an affinity, such as a national, ethnic or religious affiliation. Sometimes, respected leaders or prominent members may be enlisted, knowingly or unknowingly, to spread the word about the “investment.”