Do You Know These 7 Signs of an Investment Scam?
Investors beware: Brokers may not always be what they seem. On July 27, 2021, the SEC issued an investor alert warning investors about scammers posing as real brokers with FINRA credentials. Too often, fake brokers have persuaded investors to hand over their savings, never to be seen again. Fraudsters might create entire websites using the names, firm names, and registration credentials of real brokers. They might even build a social media presence using a real stockbroker’s identity.
You can’t always rely on obvious signs, like outsized returns. Experienced scammers might offer a more subtle sales pitch. In a volatile market, investors want more stable investments, and scammers know it. Their fake investment might offer a return that’s just above the average — just enough to tempt a conservative investor to bite.
Here are 7 red flags that should make you think twice before investing:
Red Flag #1: Cold Calling
Beware of any sales pitches from unfamiliar financial professionals. New technology may shroud a more familiar investing scam: Boiler Rooms. In a boiler room, a group of dishonest brokers cold call potential investors and use high-pressure sales tactics to convince them to purchase high-risk, speculative investments generating big profits for the brokers. It’s possible to disguise the cold calls to make the area code appear as if it’s coming from the location of a legitimate firm.
Red flag #2: Financial Firms that Specialize in One Security
Investors take note: it is highly unusual for a financial firm to only sell CDs and not other low-risk investment vehicles. Most legitimate financial firms will offer their customers a variety of investment options, and not pigeon-hole their customers into just one investment.
Red Flag# 3: High minimum deposits
Be wary of investments that call for a minimum deposit of $200,000 or more.
Red Flag #4: Methods of Payment
Unusual payment methods should immediately raise suspicion.
· Brokers should not ask you to purchase a security using cryptocurrencies.
· You also should not be asked to purchase a security using a credit card.
· Checks should not be made out to an individual, nor to a firm with different registration information than what the broker originally provided.
· You should not send money to invest via a wire transfer. Imposters have reportedly asked investors to wire money to a third party located overseas.
Red Flag #5: No Penalties for Early Withdrawals
Most investments have maturity dates and early withdrawal penalties. This falls under, “If it sounds too good to be true, it probably is.”
Red Flag #6: Online-Only Communication
Reputable brokers should be happy to meet with you, either in person at their office or via video chat. You should also be able to contact them by getting in touch with their firm. If they insist that they can only communicate through email, disengage.
Red Flag #7: Unprofessional Website
Financial professionals should have professional-looking websites. Misspellings and badly written copy should tip you off that a broker may not be what they seem.
Investors: The Best Defense is a Strong Offense
Take the initiative to review all the information your stockbroker can provide you.
Brokers: To legally execute securities transactions, a financial professional must be registered as a broker or an investment adviser. Many financial advisors have both types of registrations. Before you work with an investor, you should look up their Central Registration Depository number (CRD number) on FINRA’s BrokerCheck. If they are only registered as an investment adviser, you can look them up on the SEC’s Investment Adviser Public Disclosure record. All of the information on their profile should match the information they’ve provided, including the location of their firm.
Securities: BrokerCheck supplies investors with a “Main Contact” for every firm. Call that contact to verify information about a security supposedly offered by the firm.
Firms: Investors have reported fraudulent brokers enticing investors to invest with a fake firm they claim is a subsidiary of a legitimate firm. You can easily check this information by going to a firm’s BrokerCheck profile and clicking on the “Detailed Report” button.
Scroll down to “Firm Operations” and read the list of “Organization Affiliates.”
If the subsidiary firm does not appear in this part of the record, it may not be legitimate.
Report Suspicious Financial Professionals
If you suspect an investment adviser or a stockbroker of faking their credentials, don’t hesitate to report them. The SEC has an easy-to-use online form for reporting suspicious transactions and brokers: https://www.sec.gov/tcr
