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How to Spot and Avoid Scams

Last update on: Oct 17 2017
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Corporate accounting and mutual fund scandals are not the biggest scam risks to investors. Identity theft is a big risk, but you don’t want to focus on it so much that you lose track of the other frauds coming your way. Versions of the old-fashioned Ponzi scheme proliferate. Retirees and those close to retirement still are the main targets of Ponzi frauds.

An imprisoned scam artist recently gave an interview to The Wall Street Journal in which he revealed the secrets of his prior trade. We can learn a lot about protecting wealth from this interview.

The victims, or investors, are very carefully selected. The prime targets are from age 50 to early retirement. They must have some wealth, of course.  Certain professions are preferred by the con artists. Entrepreneurs are good targets because they generally are risk takers and like to do deals. Other desIRAble victims are car dealership owners, attorneys, restaurateurs, and dentists. But anyone with money and in the right age group is a potential victim.

Scamsters actually buy lists of potential victims’ names from companies that compile lists just for this purpose. Shopping malls are a good place for the firms to gather names. The company will promote a drawing for a free car or other attractive prize. To enter, people have to complete a questionnaire. People are so attracted to the possibility of winning that they will answer detailed questions about themselves.

The Internet is another good place to gather names. Again, the list company offers the possibility of something free in return for revealing personal information.

Once a target is selected, an important part of the sales pitch is to play up to the prevailing lack of confidence in traditional investments by talking about corporate scandals and the bear market. After a brief conversation, if the potential victim seems ripe for the scam, he is presented professional-looking literature that promises extremely high returns.

The product or service often is something that is easy for people to understand. Something highly technical or little-known isn’t likely to be part of most scams. Whether the sales pitches are done over the phone or in person depends on the location. Scam artists say in some areas of the country telephones work best; in others, victims are more likely to respond when they visit an office.

After a person invests, he or she is likely to actually receive some high payouts unless he is a late investor. That’s part of every Ponzi scheme. Early investors are paid to keep them happy and to get them to convince others to invest. Eventually, the scam runs out of new investors, and all investors lose.

It is easy to avoid getting caught in one of these scams. Follow these simple rules.

Guard your personal information. If you aren’t sure who is asking for the information and how it will be used, do not give personal information. Most people think crooks only steal data. Too often, people give it to them in the hopes of winning a prize.

Don’t even consider unsolicited investments. No matter how enticing an investment sounds, do not discuss it unless you requested the call. Do not consider investments or financial materials that you did not request.

Avoid unregistered securities and private placements. It is possible to make profitable investments this way, but they also are the tools of scam artists. Unless you are a sophisticated investor and thoroughly investigate an opportunity (or have professionals who can do it), it is best to avoid them.

Know the seller. Investments should be purchased only through established, licensed brokers. Your state securities regulator can verify that a firm and individual are registered.

Don’t depend on friends and associates. Most people get roped into scams because someone they know and trust (especially someone at church) already is in the scam and reports getting good returns. Don’t assume that someone else has done all the homework or that distribution checks are evidence a deal is legitimate. Thoroughly investigate the deal yourself.

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