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Fighting Investment Fraud

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By WendyBG
April 24, 2008

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I spent this morning at an excellent seminar called "Outsmarting Investment Fraud." It was presented by:

Doug Shadel, State Director, AARP Washington State.

John Gannon, Senior Vice President, Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business in the United States.

Martin Cordell, Director of Enforcement, Washington State Dep't. Financial Institutions,
There is a lot of information there on scams.

Because many investment frauds are directed at senior citizens, AARP is very concerned, and organized the program. This was a rollout of the program, which has only been shown in 2 states, so far.

When I signed up, I figured that the talk would be aimed at the lowest common denominator.

But I was wrong.

Instead, the organizers told the audience that, from their experience, they expected attendees to be the most knowledgeable investors. They loaded the presentation with details. Then they asked everyone to go out and spread the word. They asked each attendee to inform at least two friends or neighbors.

This forum allows me to inform many more people at once.

Investment fraud is widespread and alarming.

FINRA's research shows that, surprisingly, the typical victim of fraud is 50-60 years old, has at least a college education, has above-average income and is more knowledgeable about the general public about investing. (They tested hundreds of fraud victims, plus hundreds of non-fraud regular investors as a control group.)

What makes the typical victim of fraud more vulnerable is that they are more likely to be willing to take investment risks and are open to listening to new investment ideas or pitches. Many have also recently experienced life setbacks (e.g. loss of spouse, illness); the psychological stress apparently makes them more vulnerable and less resistant to influences.

The presenters spent a lot of time discussing the psychology of persuasion. Scammers use four main tactics to pressure potential investors.

1. Phantom Riches. Excites greed and covetousness. "Guaranteed to yield $10,000 a month!"

2. Source credibility. "I'm Vice President of Gushing Gas and Oil Company..."

3. Social consensus. "Bill Gates and Warren Buffett are buying this investment..."

4. Scarcity. "There are only a few shares time only...act now!"

The presenters had actual videos of scammers ("con criminals") in action, plus anonymous scammers who told about their tactics. These guys are leeches. They expect to make 10 calls with a NO to get to a YES. They sell (or even steal) each other's prospect lists. They phone relentlessly. How do you get on these lists? By expressing interest in any type of "high risk" (unregulated) investment. Then they all zero in, like sharks to blood.

What to do:
1. Don't go to free seminars. If you do, don't leave personal information. Also, don't give personal information (e.g. your address) over the phone.

2. Don't talk to unsolicited callers at all. Delete unsolicited e-mails.

3. If you decide to talk to an unsolicited caller (I don't know why anyone would), demand the broker's license number. Many scammers pretend to be brokers, but 90% of brokers involved in fraud are unregistered. Demand the SEC registration number of the investment. (This was news to me. I didn't know that regulated investments have registration numbers.

FINRA has a huge amount of investor information at

Investigate your brokers, investment advisors, and insurance agents:
North American Securities Administrators Association:

Bottom line:
Don't get greedy! Be highly suspicious of deals that are too good to be true.

Don't play with strangers! Don't take cold calls from brokers, regardless of the bait they dangle. Just hang up.

Don't play with friends, either. "Affinity investing" (e.g. with church sponsored organizations) may be fraudulent.

Check the registration of all investment professionals.

Check the registration of all proposed investments.

Get on the Do Not Call List.

Investigate the cost, risks, liquidity, surrender charges, fees, commissions of any investment, even if it is registered.

The following investments have been used in scams, and are considered "high risk:"

Private investments in oil and gas, real estate promissory notes, precious metals/coins/stamps, movie deals, commercial real estate, new technologies (energy, biotech), foreign currency, IPOs.
Penny stocks.
Hedge funds.
Commodity futures (outside the regular exchanges).

I learned a lot at this excellent seminar. Please share this information with others, especially those who might be most vulnerable to scammers.