This is a repost of an article by Matt Egan that appeared on CNN Money last week.
NEW YORK (CNNMoney)
Fraudsters use sleights of hand and other trickery that even magicians would be envious of. Americans lose an estimated $50 billion a year to fraud, including Ponzi schemes, pyramid schemes and other types of investment fraud.
“People fall for fraud because fraudsters are that good with special effects. It seems that real,” Michael Hendon, a representative from the Commodity Futures Trading Commission.
Here are tricks that regulators and former fraudsters cited at a recent New Jersey securities fraud summit:
1. All the cool kids are doing it! Drug dealers aren’t the only ones resorting to peer pressure.
Fraudsters try to push their victims into shady deals by attracting people from within the same social group like a church organization or an alumni association.
Such affinity fraud attempts to lower victims’ defenses and is very difficult for regulators to identify. “They prey upon the trust of that group to make them feel like this is something they want to be involved with,” said Brian McGuire, AARP New Jersey associate state director for advocacy.
2. Promising the moon: If it sounds too good to be true, it probably is too good to be true.
Forty-two percent of respondents in a FINRA poll found an annual return of 110% for an investment “appealing,” and 43% said the same about fully guaranteed investments.
“If someone tells you your investment is guaranteed, that’s when your spidey sense should come on,” says Peter Cole, director of special investigations at the New Jersey Bureau of Securities.
3. False sense of urgency: Just like pushy car sales people, fraudsters try to pressure their victims into making decisions before they can do their homework.
They’ll say the offer must be made on the spot because the deal closes soon or supply is running low. “There are very few once in a lifetime opportunities. Real investments, the real deals, will be there tomorrow,” said Gerri Walsh, president of the FINRA Investor Education Foundation.
4. Pretenders: Fraudsters capitalize on people’s willingness to trust them.
While they may claim to be registered investment advisers or certified financial planners,that’s not always the case. Investors can easily check the status of a purported broker or investment adviser by logging into FINRA’s BrokerCheck website. Look for obvious red flags like securities violations.
5.Cooking the books: Some fraudsters exploit the system by finding weaknesses in the auditing process.
“Want to trust audited numbers? I used to brag about them all the time,” said Sam E. Antar, former CFO of Crazy Eddie, the electronics chain that became a symbol for corporate fraud in the 1980s.
Antar pointed to a report by the Association of Certified Fraud Examiners that shows external audits rarely uncover fraud.