Know the Red Flags of Investment Scams – Your Health Depends on It

It seems that if you are going to fall victim to a fraud, it may in one way or another stem from a relationship with a family member, co-worker, friend or neighbour and you may very likely live in British Columbia or on the Prairies.

That’s the profile that resulted from a survey for the Canadian Securities Administrators (CSA) that also indicated nearly five per cent of the adult population has lost money in an investment fraud. About half were introduced to the fraud through someone they knew. Making the situation worse, fewer than 24 per cent of victims report the fraud either because they are embarrassed, lacked proof or didn’t lose much money.

Attempted fraud also scored high, with nearly three in 10 respondents saying they were approached within the past three years. About one-third of those approaches were through e-mail spam. Yet only 17 per cent of those approached reported the attempt.

Half of victims also feel law enforcement authorities don’t take financial fraud as seriously as other crimes, and 70 per cent believe crooks tend to get away with fraud or, if caught, receive light sentences at most.

Three quarters of fraud victims said they did not recover any of their investment in the most recent scam they were involved in.

But victims aren’t hurt just financially. More than 90 per cent of respondents said they believe investment fraud is as serious as such violent crimes as robbery and assault when it comes to emotional, mental and physical health.

Among the effects of fraud are a decline in the ability to trust people, wariness about future investments, stress, anger, depression, feelings of extreme loss or isolation, significant weight loss or gain, increased vulnerability to illness, and panic or anxiety attacks.

The CSA, which represents the country’s 13 provincial and territorial securities commissions, recommends that all investors educate themselves about the warning signs of fraud and remain objective when it comes to controlling their money.

Here are 10 tips to help you avoid falling victim to an investment fraud and suffering both the financial and emotional damages that can result:

1. Know what you are buying. Never make an investment you don’t understand. Ask questions and make sure you get answers. Always discuss potential investments with your accountant for a second opinion and to discuss how the investment might fit into your long-range financial goals.

2. Ask for documentation. Fraudsters do not like to leave a paper trail. If there is no documentation or the documents are hard to understand, question the investment. Never accept a verbal contract and never sign anything you haven’t read or don’t understand. Have your accountant go over everything with you.

3. Check registrations. Make certain the security is qualified for sale and has been properly registered with a regulatory body. Also be sure you’re dealing with a registered broker.

4. Spread your risk. Diversify the investments in your portfolio. Putting all your money in one major investment is widely considered a road to disaster.

5. Take notes. Every time an investment salesperson approaches you, write down the name, the date and the time. Never assume that a salesperson is an “expert.”

6. Be wary of extravagant promises of high-return and low-risk; excessive use of technical or financial jargon, and offers of free seminars, workshops or other perks.

7. Don’t be taken in by high-pressure sales tactics; heavy emphasis on a company’s track record, or strong promotions of tax savings or tax shelters, particularly during the annual Registered Retirement Savings Plan season in January and February.

8. Avoid thinly traded or little-known securities that can be vulnerable to price manipulation.

9. Don’t believe claims from “insiders” with “special” information.

10. Contact your province’s securities regulator if you have doubts about an investment or the seller of an investment.

Bottom Line: Common sense, information, awareness, skepticism and advice from your accountant all play a role in protecting yourself from investment scams.