How to Avoid Financial Fraud

Editor’s note: As we get older, having enough money becomes even more crucial for a number of reasons: to have a comfortable retirement and to be able to pay for health expenses and long-term care. Financial fraudsters prey on just those concerns, and trusting the wrong person can be catastrophic. Here, the Securities and Exchange Commission (SEC) offers some tips on how to avoid financial disaster:

Seniors  are  particularly  vulnerable  to  tactics  of  scam  artists  who are “nice” or attempt to develop a false bond of friendship.  Scam  artists  prey  on  seniors  who  are  polite  to  others  and have difficulty saying “no” or feel indebted to someone who has provided unsolicited investment advice.


Ask questions and check out the answers. Fraudsters  rely  on  the  fact  that  many  people  simply  don’t  bother to investigate before they invest. It’s not enough to ask a promoter for more information or for references—fraudsters have  no  incentive  to  set  you  straight.  Savvy  investors  take  the time to do their own independent research and talk to friends and family first before investing. Make sure you understand the investment, the risk attached, and the company’s history. And remember, if the product sounds too good to be true, it is!

Research the company before you invest. You’ll want to fully understand the company’s business and its products or services before investing. Before buying any stock, check out the company’s financial statements by using the SEC’s EDGAR database at  or contact your state securities regulator. Remember that unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions.

Know the salesperson. Spend some time checking out the person touting the investment before you invest—even if you already know the person socially.  Always  find  out  whether  the  securities  salespeople  who contact you are licensed to sell securities in your state and whether they or their firms have had any troubles with regulators or other investors. You can check out the disciplinary history of brokers and advisers quickly—and for free—using the online databases of the SEC and the Financial Industry Regulatory Authority (FINRA). Your state securities regulator may have additional information.

Never  judge  a  person’s  integrity  by  how  he  or  she  sounds.  Successful con artists know how to sound professional. They can  make  even  the  flimsiest  deal  sound  like  a  “sure  thing.”  Con  artists  know  that  the  appearance  of  professionalism  combined  with  polite  manners  or  overtures  of  friendship  may lead many older investors to accept their advice.

Watch out for salespeople who prey on your fears. Con artists know that many seniors worry about the adequacy of their retirement savings, especially if they are facedwith  costly  medical  expenses.  As  a  result,  fraudsters  know  to pitch their schemes as a way to increase the older investtor’s financial security to the point where such fears are no longer necessary.

Take your  time—don’t  be  rushed  into  investment  decisions. Just  because  someone  you  know  made  money,  or  claims  to have  made  money,  doesn’t  mean  you  will  too.  Be  especially  skeptical  of  investments  that  are  pitched  as  “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information. Remember that a fraudster does not want you to think too much about the investment because you might figure out the scam.

Be wary of unsolicited offers. Be especially careful if you receive an unsolicited fax or email about a company—or see it praised on an Internet bulletin board—but can find no current financial information about the company from other independent sources. Many fraudsters  use  email,  faxes  and  Internet  postings  to  tout  thinly  traded stocks, in the hopes of creating a buying frenzy that will push the share price up so that they can sell their shares. Once they dump their stock and quit promoting the company, the share price quickly falls. And be extra wary if someone you don’t know and trust recommends foreign or “off-shore” investments. When you send your money abroad, and something goes wrong, it’s more difficult to find out what happened and to locate your money.

Don’t lose sight of your investments. Don’t rely on a financial professional who says “leave everything to me.” Always monitor the activity on your account and request regular statements. You should never feel uncomfortable about questioning any trading activity that you don’t understand. Remember—it’s your money.  You also should keep all records of conversations that you have about any of your investments.

Question why you cannot retrieve your principal or cash out your profits. If your broker, financial adviser or other person with whom you have invested your money stalls when you request your principal or profits, this may be because that person has already pocketed your money. Don’t be fooled by explanations as to why your money is inaccessible or by suggestions that you roll over your “profits” into other investments.

Never be afraid to complain. If you suspect fraud or a questionable practice and the explanations  that  you  receive  are  not  satisfactory,  do  not  let  embarrassment or concern that you will be judged incapable of handling your own affairs prevent you from filing a complaint with the SEC, FINRA, or your state regulator.


SEC:  (800) 732-0330

FINRA BrokerCheck:  (800) 289-9999

State Regulators:  (202) 737-0900

This article appears in a compilation by the federal government; click here to view more consumer publications. For more information on how to protect yourself from investment fraud, click here to download the SEC’s booklet, A Guide for Seniors: Protect Yourself From Investment Fraud.


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