Individuals and businesses that are the victims of investment fraud have a legal right to file a lawsuit against the person and/or company that committed the fraud. The perpetrator can be civilly liable in addition to whatever criminal penalties they may face. Many investment fraud cases arise when the victim notices signs of fraud and reports them to the authorities. Below, we discuss several ways to identify investment fraud so you can take the steps necessary to both report the perpetrator and file a lawsuit to recover compensation for your damages.
First, investors should be wary of unsolicited offers. Fraudsters will often reach out proactively. You should be skeptical of someone who wants to sell you what they claim is a great investment opportunity. Read onward to learn more about our tips for identifying investment fraud.
Before you invest in something, you need to make sure you understand what you’d be investing in. In a different context, Warren Buffet has famously said to “never invest in a business you cannot understand.” If you cannot completely understand an investment, you are more vulnerable to fraud. Fraudsters often use intentionally complex phraseology to deliberately confuse potential investors. If the investment opportunity was legitimate, the salesperson would be simplifying it for you to understand instead of the other way around.
Be sure to also ask plenty of questions about the investment, noting that any vague or inconsistent answers are a glaring red flag. If your questions are not being answered to your satisfaction, it is a sign that something is wrong. A legitimate salesperson will take the time to answer your questions. Otherwise, you should suspect they are dodging your questions because truthful answers would reveal their charade.
You should only deal with licensed investment professionals. These professionals are registered with a self-regulatory organization. If they’re registered with the SEC, for example, you can check their registration status and whether they have a disciplinary record. You should also research the investment firm to see if it has a bad history. Even if the salesperson and their firm seem legitimate based on your research, if your gut tells you that you cannot trust them, you should trust your intuition.
You should also be skeptical when anyone guarantees you specific investment returns. No investment comes without risk. Usually, the higher the potential return, the more risk that you take. The adage about something being too good to be true is usually the case with investing. If someone is offering something that seems like an incredible investment choice, you should ask yourself “why me?” The more fantastic the promise, the more you should doubt it. If the investment opportunity was so fantastic, well-heeled investors and institutions would have been offered the opportunity first and already be invested – so check and see who else is investing in opportunities you are considering if that information is publicly available and/or the firm can reveal it.
Finally, when someone is pressuring you to send money at that very moment, you should ask why the investment would not be available tomorrow. Someone who is overly pushy has their motivations at work. Legitimate investments don’t suddenly disappear without immediate action (although, for several reasons, they may not be as attractive down the road). You should almost certainly not “act now” and should instead take your time to make the proper investment decision.
You should be the most vigilant about unregistered investment products. Investments that are registered with the SEC at least have some degree of scrutiny. If the investment seems like it is a common pool where you make money based on the efforts of a third party, it should be registered. If it is not registered, the promoter and seller are likely already breaking federal law.
Even when you have invested, you must remain vigilant. You should receive regular documentation and statements about the status of your investments. Check your entire account statement and not just the balance. You may see evidence of transactions that you never made, which you should immediately question. In some cases, this may just be a mistake. In other cases, someone may be churning your account, parking securities there, and/or taking other actions that you likely would not have approved of and that may indicate fraud.
In addition, you should look to see where your money is being held. An investment manager should not have custody of your money themselves. Your money should be held by an independent third-party custodian to avoid illegal conduct or theft. If someone other than such a custodian is holding your money, this is a warning sign.
When it comes to the actual investment, you should closely scrutinize the financial information you are provided. If the investment returns seem extremely steady without any variance whatsoever, you should be suspicious. Markets and investments are volatile, and returns can vary monthly and yearly. In the case of Bernie Madoff’s Ponzi scheme, for example, one of the many missed cues was that investment returns were generally steady no matter the market conditions. If your investment does not have its ups and downs, you should be suspicious.
When you suspect investment fraud, it is crucial you take action quickly. There are two things that you should do:
With possible investment fraud, you are always better off erring on the side of caution and speaking up if you suspect something is wrong. Time is of the essence with this kind of wrongdoing, and even a slight delay can leave you more vulnerable to fraud.