Four Rules for Avoiding Investment Scams

Four Rules for Avoiding Investment Scams

The San Jose Mercury News reported today that Michael Brendan Ferguson of Foster City was arrested for fleecing over 100 investors out of millions via a Ponzi scheme involving ATM machines.  One victim told the newspaper that she had lost her entire life savings (over $750,000) in the scam.

While Ponzi schemes are nothing new (remember Bernie Madoff?), you might be surprised to discover just how frequently they crop up.  The FBI’s financial fraud unit posts information on investigations: http://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011.  The latest report from 2011 indicates 1,846 financial fraud cases actively under investigation.  They even cite some examples.  There’s Joseph Blimline, currently awaiting sentencing for orchestrating one of North Texas’ largest oil and gas investment Ponzi schemes, defrauding 7,700 investors of over $485 million. Blimline issued approximately 20 oil and gas offerings and used a significant amount of the money to purchase oil and gas assets from earlier offerings and to pay dividends to earlier investors to facilitate the scheme.

There’s also A&O Entities, which sold fractionalized, no-risk interests in life insurance policies to elderly investors with promised rates of return from 9 to 15 percent.  The owners, Chris Allmendinger & Adley Adulwahab, diverted more than $50 million for their personal benefit.  They received 45 years and 60 years imprisonment (respectively), the second-longest white-collar criminal sentence in the history of the Eastern District of Virginia.

I’ve written on this topic before.  Virtually every victim of every financial scammer says the same thing about the perpetrator: he/she was charming, persuasive, and trustworthy.  Obviously, believing that someone is trustworthy is not sufficient to protect yourself from getting taken.  There are, however, four simple rules you can follow to avoid getting fleeced by people like Ferguson.  To repeat, they are:

  • Make sure you understand how the investment works (including the risks and the tax consequences).  If you don’t you’re simply setting yourself up for failure.  This is true whether you’re evaluating common investments – such as mutual funds or residential real estate – or exotic ones such as accounts receivable factoring or life settlements.  If the promoter is not explaining things to your satisfaction, go somewhere else.
  • Always remember the adage, “If it’s too good to be true, it probably is!”  Most scammers promise consistent, safe returns that are well above the average for the type of investment being promoted.  Do you know what the average is?  If not, go back to the above rule.  Then ask the promoter to explain what his/her company is doing to be able to generate those higher returns without taking on more risk.  (Hint: it’s not possible or everyone would be doing it.)
  • Stick to publicly traded securities that are listed on major exchanges.   These types of investment companies are scrutinized by numerous government and private agencies and have to report financial information on a regular basis, making it much harder for fraud to remain undetected.  And with more than 10,000 different mutual funds and ETFs currently available (according to the Investment Company Institute), it’s hard to justify the need to invest in non-public alternatives for most investors.
  • Don’t put all your eggs into one basket.  This is the single most important rule.  Even if your most trusted friend suggests an investment, never ever commit all your money to that one bet.  Don’t let greed override your common sense.

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