What do you know about financial fraud?
Promissory notes and Ponzi schemes are the leading products or schemes that are likely to trap investors in 2020, according to Christopher Gerold, the president of the North American Securities Administrators Association (NASAA).
Also on the top five list (based on investor complaints and ongoing investigations) are real estate investments, cryptocurrency-related investments, and social media- and Internet-based investment schemes.
NASAA is the oldest international organization devoted to investor protection in the United States, Canada and Mexico. It is the voice of 50 state security agencies responsible for efficient capital formation and grassroots investor protection.
I spoke with Gerold and other NASAA representatives to determine how investors can protect themselves against common signs of investment scams.
According to Gerold, the most common telltale sign of an investment scam is an offer of guaranteed high returns with no risk.
He also indicated that many of the threats facing investors involve private offerings, which are exempt from federal securities registration requirements and are not sold through public stock exchanges.
He recommended NASAA’s investor fraud quiz (nasaa.org/investor-education/investment-fraud-awareness-quiz). I took the quiz and found it to be informative.
Here are some of the questions and answers (see the website for a detailed discussion of the answers to the quiz):
1. Which of the following phrases should raise your concern about an investment?
- High rate of return
- Guaranteed against loss
- You must invest now
- All of the above
Answer: e. Beware of any salesperson who tells you an investment is risk-free and provides a guaranteed high rate of return.
2. Security laws protect investors by requiring companies to:
- Show profits before they can sell stock
- Provide investors with specific information about the company
- Pay dividends
- Repay investors who have lost money
Answer: b. Securities regulation is based on a disclosure system: Laws require companies to provide investors with specific information. Companies don’t have to show profits or pay dividends to sell stock. There is no requirement to repay investors who lost money investing.
3. In which situation are you taking the least amount of risk?
- Buying a certificate of deposit (CD) in the U.S.
- Investing with someone you know from your church or community association
- Investing offshore
- Investing with someone who contacted you by phone
Answer: a. Although buying a CD is low risk, you should investigate insurance levels in the event of the bank’s failure. In addition, you should consider inflation risk when you invest in low-return investments. All your investments shouldn’t be in low-risk investments if you need capital growth as part of your investment objectives.
4. A fellow book club member tells you about an investment opportunity that has earned 20% during the past year. Your investments have been performing poorly, and you are interested in higher returns. This person is your friend and you trust him. What should you do?
- Ask your friend for more information about the investment so that you can understand the risks before you make a decision
- Invest only a small amount to see how things go before you make a larger investment
- Call your securities regulator to see if the investment has been registered or is properly exempted for sale
- Both a and c
Answer: d. You should never make an investment simply based on word of mouth, even if the recommendation comes from a family member, friend or acquaintance. Ask for more information and call your securities regulator to see if the investment has been registered or exempted for sale.
For other questions and answers, visit the fraud center website. NASAA provides a link to the interactive map of state security regulators in the U.S. at nasaa.org/contact-your-regulator. It provides investor alerts at nasaa.org/category/investor-advisories.
Elliot Raphaelson welcomes your questions and comments at firstname.lastname@example.org.
© 2020 Elliott Raphaelson. Distributed by Tribune Content Agency, LLC.