Nothing like a Wall Street rally to pump up investors. Eager to recoup losses from last year's market plunge, many recession-battered consumers could be eyeing the Dow's recent recovery as a chance to dive back in.
But don't take the leap with your eyes closed.
Investment fraud is always out there, and every year plenty of otherwise-smart people get suckered into phony investment scams.
Just ask the thousands of big-name investors and high profile institutions that were financially devastated last December when Bernie Madoff's $50 billion Ponzi scheme collapsed.
You could be next.
"People need to be aware: There are many mini-Madoff schemes that don't make the press," said John Gannon, president of the FINRA Investor Education Foundation in Washington.
What's the tally? No current estimates are readily available, but investment fraud nationwide in 2000 exceeded $40 billion and losses from Internet- related stock fraud topped $10 billion, according to data compiled by the National White Collar Crime Center in Washington.
In 2008 alone, those statistics were swallowed up by just two cases -- Madoff and Texas financier R. Allen Stanford.
Here's how to avoid getting trapped by investment fraudsters.
Before signing up with investment professionals, check to be sure they're licensed and the product they're selling is registered. It's relatively easy at Web sites such as the Financial Investment Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC) or your state securities regulator. At FINRA's "BrokerCheck," for instance, you can look up individuals or firms to check their licensing and history of complaints and compliance.
"We have a database of 500,000 brokers and nine of 10 have no black marks on their records or compliance problems," said FINRA's Gannon.
But, he warns, don't be fooled by impressive-sounding titles on a business card.
There's at least one designation -- a "certified adviser for senior investing" -- that the foundation says is completely phony but has been used by unscrupulous investment peddlers.
"Anybody can be a self-proclaimed expert. Just because someone has a number of letters behind their name, doesn't mean they're licensed," said Gannon.
Beware of 'affinity fraud' It's the friendly guy you know through your church or synagogue. Or someone you've met through a cultural group or a connection at work. They're selling something -- annuities, real estate deals, insurance-backed investments. And because you have a natural "affinity" with the person, you drop your guard.
"A lot of investors are their own worst enemy because they don't do their due diligence," said Jack Waymire, who runs two investor education Web sites, paladinregistry.com and investorwatchdog.com.
With any investment pitch, consumers should request a written prospectus detailing the risks and returns, then seek a second opinion from a qualified outsider.
The invitations to a free meal in a fancy restaurant or hotel typically arrive in the mail. They're billed as educational seminars on financial topics, and they're all too common. In a 2007 survey of investors ages 60 and over, FINRA found that nearly 60 percent of respondents had received six or more invitations to a "free" investment lunch or dinner in the last three years.
There's nothing inherently wrong with this type of sales approach, but investors are advised to be skeptical and ask lots of questions. To avoid the hard sell, here's more advice from investor education experts:
Before you attend, do your homework. Check to be sure the individual and the investment product are licensed and registered.
When you walk in the door, don't be swayed by a well-dressed speaker and a fancy restaurant setting. Be wary of sales pitches with confusing comparisons or misleading claims about the performance and returns.
Don't be pressured by any "urgency" that you must sign up immediately to get a prize, a lowered commission or a one-chance "opportunity."
And don't purchase anything until you've done your own research or talked with another qualified professional.
Bottom line
With any investment you're considering, ask questions:
What are the risks? What's the return? How liquid is it (meaning, how easily can I cash out if needed)? What are the surrender fees if I decide to sell?
Smart investors don't let themselves get rushed into risky investments. To avoid Madoff-like misery, there's one classic adage that never goes out of style: If it sounds too good to be true, it probably is.
(Reach Claudia Buck at cbuck(at)sacbee.com. For more stories, go to scrippsnews.com.)
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I happen to know firsthand
I happen to know firsthand that someone could have followed everyone of your suggestions and still invested in Stanford International Bank's CDs. The firm and its financial advisors were both licensed, and the product was registered. Stanford Group Company was a member of FINRA, with some of the best financial advisors in the country working there by traditional measures of: credentials (CPAs, CFAs, CFPs, etc.) and experience (many had decades of experience at the most prestigious Wall Street firms before joining Stanford, and no flags or complaints on their FINRA U-4s). In fact, the advisors were also victims of the fraud perpetrated by Allen Stanford and a handful of co-conspirators. The SIB CD product was registered with the SEC through a Regulation D filing. The answers to questions like liquidity, risk, return, surrender fees, and whatever else one might have asked would have satisfied any reasonable person. However, when people are willing to commit fraud, doctor financial statements, and then bribe auditors and bank regulators, there's not a lot that anyone can do to uncover it. In hindsight, the one thing I think an investor can do to protect themselves from the likes of Stanford and Madoff is to insist on complete transparency down to the individual security level. If an investment advisor is unwilling to allow this (Stanford and Madoff were not), then I would not invest in that product.
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