saving and investing unit 4: investment fraud. the best defense against investment fraud is a smart...

Saving and Investing

Unit 4: Investment Fraud

The best defense against investment fraud is a smart investor.

1. Knowing how to make sound economic decisions prevents becoming a victim of

investment fraud.

2. Unwary victims suffer large financial consequences (costs American consumers $40

billion per year).

3. Unwary victims suffer lost confidence in the marketplace.

The best defense against investment fraud is a smart investor.

The tactics of con artists do not differ from scheme to scheme.

Investment Scams, Schemes, and Swindles

Fraud involves deceiving a person by misrepresenting the truth in order to deprive

them of their hard-earned savings.


Victims range from the rich to lower-income, blue-collar workers, celebrities, college

presidents, accountants, teachers, manual laborers, and high school students.


Many investors never get a penny of their money back.


1. Con artists appeal to the greed of some victims.

2. Con artist appeal to the fears of some victims (medical bills, College, retirement).


MAJOR TYPES OF INVESTMENT FRAUD Pyramid schemes Ponzi schemes Precious metals fraud Stock swindles Phony international investments Affinity fraud Bogus franchise and business

opportunities

PYRAMID SCHEMES—each member of a group will receive a profit or a cut for recruiting

new members to join the scheme.

PONZI SCHEMES--

Named for Charles Ponzi New England postage stamp speculation Said he could provide a 40% return in just

90 days compared to 5% at the bank Paid early investors to make it look good Ponzi had only about $30 worth of stamps

PRECIOUS METALS--

Coin swindles—sell low-quality coins

Gold mining schemes—New technology to recover trace amounts. All one gets is dirt. Bullion deals—Offer bullion storage services; investor never sees the product.

STOCK SWINDLES--Pose a major threat to consumers.Little-known company stocks with relatively small numbers of shares that can be easily manipulated.Stock is about to double or triple in value.

PHONE INTERNATIONAL INVESTMENTS--

Caused by rapid political and economic changes overseas.

Example: An overseas bank existed only on paper—a gas station attendant went to the post office, picked up investor's checks, and mailed them to the con artist.

AFFINITY FRAUD--Investment schemes that prey upon members of identifiable groups.Exploit the sense of trust and friendship that exists in the groupA scam is less likely to be detected by regulators and law enforcement officials in a tight-knit structure.One who inspires trust promotes the scheme.

BOGUS FRANCHISE AND BUSINESS OPPORTUNITIES--

Appeal to the dream of being your own bossAdvertised in media outletsOften offer high incomeExamples: Work-at-home and animal-raising schemes

How Telemarketing Works

Email, Web sites, and Internet are the newest friends of scam artists. The telephone is the swindler's weapon of choice. Phone scammer can make 100 calls per day. Have databases of special lists of people “Boiler room” operations because they “turn up the heat.”

How Telemarketing Works

Fraudulent sales callers are skilled liars and experts at deceit. Coached to learn to say whatever it takes to get victims money. Make hundreds of repetitious calls hour after hour

How Telemarketing Works Sales Pitches with slick talk about little or no risk, secret tips, and an unrealistic high rate of return. Demand for immediate action. --today No disclosure of the street address of the boiler room operation.--mail drop No use of the U. S. mail system.--couriers, delivery services Stalling suspicious investors who suspect that they have been defrauded.--lull letter—delay Pulling a vanishing act—move to another state, switch scams

SELF DEFENSE TIPS AGAINST FRAUD

1. STOP AND THINK BEFORE ACTING--

Get written information and evaluate it. The first priority of people who sell investments is to

make money.


2. STUDY THE DEAL—AND GET INPUT--

Read the material, seek counsel from knowledgeable investor, never provide personal

or financial information


3. STICK TO WHAT IS CLEARLY UNDERSTOOD--

Stick with investments one understands; do not sign papers before reading; involve a lawyer or

investment professional


4. APPLY CRITICAL-THINKING SKILLS--

Ask questions: Is it too good to be true? How much will the salesperson get in fees or

commissions? What is the track record of the investment?

How Regulators Help to Protect Investors

The biggest obstacles to stopping investment fraud are the embarrassed individuals who

would rather suffer their losses in silence than admit that they have been cheated.


1. North American Securities Administrators Association

2. U. S. Securities and Exchange Commission (SEC)

3. Financial Industry Regulatory Authority (FINRA)


“CAVEAT EMPTOR”

LET THE BUYER BEWARE

ASK YOUR INSTRUCTOR FOR THE UNIT 4 TEST

The End

saving and investing unit 4: investment fraud. the best defense against investment fraud is a smart...

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