Be Aware of Common Investment Fraud Tactics and “Red Flags”

Investment fraud victimizes people of all backgrounds and education levels. Scam artists don't discriminate. The best thing an investor can do to protect him or herself from investor fraud is to be aware of common fraud tactics and to watch out for the recognized "red flags" of stockbroker abuse and misconduct. The FInancial Industry Regulatory Authority (FINRA) highlights the seven biggest "red flags" of investment fraud in an Investor Alert on their website.

The main warning signs to watch for are:

  1. Guarantees on returns. All investments carry some amount of risk. A "guarantee" is a sign the advisor or sales agent may be misrepresenting the investment.

  2. An unregistered security or sales agent. Many investment scams are run by unregistered agents selling "private offerings" in an unregistered company.

  3. Returns that don't fluctuate with the market or seem overly consistent. If an investment product gains a steady return month after month, particularly in a time when the market is experiencing significant fluctuations, this could be a sign the product is a scam.

  4. An overly complex investment product. A registered securities agent or stockbroker should be able to clearly explain the investment strategy of any product being offered. An investor should always understand the risks, benefits, and expected results before purchasing it.

  5. Missing documentation. Make sure expected documentation is provided. If sales agent doesn't provide a prospectus or an offering circular, the product may not be registered.

  6. Inaccurate documentation and statements. Double-check all account documentation and account statements for errors. Missing funds, unauthorized activity, and trade confirmation inaccurately marked "UNSOLICITED" are all things to monitor.

  7. Pushy sales tactics. A legitimate professional shouldn't pressure an investor.

Other less common but important red flags, include:

  • A new account form that asks for little more than the investor's name, address and social security number, or a stockbroker who does not discuss the investor's current assets, goals for investment and risk tolerance at the time a new account is established;

  • A stockbroker who pushes buying on margin; and

  • Poor communication and/or poor service.

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