Avoiding Securities and Investment Fraud
By Aaron Larson
Law Offices of Aaron Larson
July, 2004
Contents
Those who operate investment scams are often very sophisticated in the manner in which they approach investors, present false information, and cover the most obvious tracks which would betray their fraudulent intentions. However, investors can usually protect themselves from most cases of stock or securities fraud by exercising common sense - it is usually a willingness to believe an offer that is "too good to be true" which leads investors to fall victim to scams.
Warning Signs
Common warning signs of possible investment fraud include:
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Promises of high rates of return
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Promises of guaranteed profit
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Promoters who use addresses in another country
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Promoters who use post office boxes or "mail drops"
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Promises that you are "getting in on the ground floor" of a new opportunity. (For most investments, by the time you're even aware that there is a ground floor, the time to "get in" at that level has long passed.)
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High-pressure sales tactics from the people backing the investment
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Promoters who won't back up their claims and promises in writing
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Promoters who won't tell you how they are being compensated
Steps to Avoid Fraud
While the steps to best detect and avoid a particular fraud will vary, depending upon its nature and the conduct of its promoters, the following actions will help investors detect most instances of fraud:
- Remember that even the most professional website or investment brochure can be entirely fraudulent. Independently verify their claims.
- Obtain and review financial statements in advance of making an investment
- Verify the claims of the investment promoters. For example:
- If they claim to have a contract with another major company, customer or supplier, contact the other company and find out if the claim is true.
- If they claim to have applied for patents for new inventions, review copies of the patent applications, and verify that the applications have been submitted. (For patents submitted in the United States, this can be done through the website of the United States Patent and Trademark Office.)
- Investigate the principals of the company, and their background in the business. Are they associated with prior successful (or unsuccessful) ventures? Or, for that matter, have they ever been associated with a legitimate business?
- Check with government regulators:
- Find out where the company is incorporated, and check its incorporation records in that state, and obtain its most recent annual report.
- If the company or investment opportunity is of sufficient size or scope to require registration with the Securities and Exchange Commission (SEC), verify their claims against the filings they have made with the SEC, using the SEC's free, online EDGAR database. If you cannot find the company in the EDGAR database, contact the SEC at (202) 942-8090, and ask if there are any other SEC records of the company or its activities. Be wary of any investment opportunity that is not registered with the SEC.
- Whether or not the SEC has information on the company, also check with state securities regulators to see if the state has information on the investment or its backers.
- Check with the National Association of Securities Dealers (NASD) to see if they have information about the promoters or backers of the investment opportunity.
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