The first line of defense against investment fraud is your inalienable right to ask questions and—until you get the right answers to say “no.” And mean no. Not surprisingly, this is usually an investment swindler’s first point of attack. To keep you from asking questions, he asks them! Invariably, the questions have “yes”answers, such as “You would at least be interested in hearing about such a fantastic investment opportunity, wouldn’t you?” or, “You would like to make a large amount of money in a short period of time with little or no risk, right?” One difference between a reputable investment firm and a swindler is that reputable firms encourage you to ask questions, to obtain as much information as possible, to clearly understand the risks involved, and to be entirely comfortable with any investment decision you make. The only thing a swindler wants is your money. These are some of the questions that swindlers don’t like to hear:
1. Where did you get my name?
If the response is that you were chosen from a “select list of intelligent and prudent investors, ”that select list may be the telephone directory, or a purchased list of persons who’ve bought certain types of books, subscribed to particular magazines, or responded to newspaper ads. If you have made ill-advised investments in the past, you can be pretty sure your name is on someone’s alumni list. It’s the list swindlers prize most. Easy preys who are eager to recoup (but are doomed to repeat) their earlier losses.
2. What risks are involved in the proposed investment?
Except for obligations of the U.S. Treasury, which are considered risk-free, all investments involve some degree of risk. And some investments, by their nature, involve greater risks than others. Keep in mind that if the salesman had knowledge of a sure-thing, big-profit investment opportunity, he wouldn’t be on the phone talking with you.
3. Can you send me a written explanation of your investment so I can consider it at my leisure?
For someone peddling fraudulent investments, that can be a double turn-off. For one thing, most crooks are reluctant to put anything in writing that might cause them to run afoul of postal authorities or provide material that, at some point, might become evidence in a fraud trial. Secondly, swindlers don’t want you to do anything at your leisure. They want your money now. It’s a good rule of thumb that any investment which “absolutely has to be made immediately” shouldn’t be made at all.
4. Would you mind explaining your investment proposal to some third party, such as my attorney, accountant, investment advisor or banker?
If the answer goes something along the lines of “normally, I’d be glad to, but there isn’t time for that,” or if the salesman snaps back by asking “can’t you make your own investment decisions,” these are virtually certain clues that your final answer should be an emphatic “no.”
5. Can you give me the names of your firm’s principals and officers?
Although some persons who establish and operate dishonest firms change their own names as often as they change their firms’ names, even the hint that you are the kind of investor who checks into things like that can be a fast turn-off for a swindler.
6. Can you provide references?
Not just another list of other investors who supposedly became fabulously wealthy (the names you get may be the salesman’s boss or someone sitting at the next phone), but reputable and reliable recommendations such as a bank or well-known brokerage firm that you can easily contact.
7. Do you have any documents such as a prospectus or risk disclosure statement that you can provide?
This may not be available in connection with all types of investments but in many investment areas—such as securities, futures and options trading—it’s required. And there can be requirements that you be provided with this information and acknowledge in writing that you have read and understood it. Obviously, it’s not the sort of information a swindler is likely to distribute.
8. Are the investments you are offering traded on a regulated exchange, such as a securities or futures exchange?
Some bona fide investments are and some aren’t, but fraudulent investments never are. Exchanges have strict rules designed to assure fair dealing and competitive price determination. There are also mechanisms to provide for rule enforcement and to impose severe sanctions against those who fail to observe the rules.
9. What governmental or industry regulatory supervision is your firm subject to?
If the salesman rattles off a list that ranges from the FBI to the Boy Scouts, tell him you’d like to check the firm’s good standing before making an important investment decision. Then verify the response. Few things discourage a swindler faster than the thought that his first visitor the next morning may be from a regulatory agency. If, on the other hand, you are told his particular area of investment isn’t subject to regulation (perhaps because everyone in his business is an ethical, upstanding citizen), take that ex17 explanation for whatever you think it’s worth. At the very least, keep in mind that any ongoing supervision which isn’t being provided by a regulatory organization or agency will have to be provided to you.
10. How long has your company been in business?
In any kind of business activity, there can be advantages to dealing with a known, established company. This isn’t to say that new businesses aren’t starting up all the time or that the vast majority aren’t perfectly reputable. But if you find yourself talking with someone who doesn’t seem to have a past, it can be worthwhile to find out why. Many swindlers have been running scams for years but understandably aren’t anxious to talk about it.
11. What has your track record been?
Before you accept a salesman’s assurance that he can make money for you, you have the right to know what his performance has been in making money for others. And ask to have the information (if there is any) in writing. Boasting over the phone is one thing; putting it down on paper is quite another. In any case, even if you are able to obtain a documented performance record, don’t lose sight of the fact that past performance in itself provides no assurance of future performance.
12. When and where can I meet with you or with another representative of your firm?
Chances are a crooked operator particularly if he is operating out of a telephone boiler-room isn’t going to take the time to visit with you and even more certainly doesn’t want you to see his place of business.
13. Where, exactly, will my money be?
And what type of regular accounting statements do you provide? In many investment areas, such as futures trading, firms are required to maintain their customers’ funds in segregated accounts at all times. Any mingling of investors’ funds with those of the firm or its principals is prohibited. You might also want to find out what, if any, routine outside audits the firm’s account records are subject to.
14. How much of my money would go for commissions, management fees and the like?
And ask whether there will be other costs such as interest or storage charges, or whether the investment agreement involves any type of profit sharing arrangement in which the firms’ principals participate. Insist on specific answers, not glib and evasive responses such as “that’s not important” or “what’s really important is how much money you are going to make.” And, again, get it in writing, just as you would any other type of contract.
15. How can I liquidate (i.e., sell the item I’d be investing in) if and when I decide I want my money?
If you find that the investment is illiquid, or there would be substantial costs if liquidated, or that you are unable to get straight and solid answers, these are all things to consider in deciding whether you want to invest.
16. If disputes should arise, how can they be resolved?
Short of having to go to court to sue someone, does the company or regulatory organization provide a mechanism for resolving disputes equitably and inexpensively through arbitration, mediation, or a reparations procedure? Aside from seeking important information, you may be able to detect whether the salesperson is uncomfortable or impatient with this line of questioning. Swindlers generally will be.