Editor’s note: I was interviewed on KSL’s Sunday Edition with Doug Wright last week. The discussion about Ponzi Schemes and affinity fraud in Utah happens at 8:18. I appreciate KSL Television’s willingness to engage in a frank discussion about why affinity fraud is a particularly vexing problem here in Utah, and to help get the word out on how to prevent these scams.
Every week Utah residents lose money by investing with friends, family or neighbors – people they knew and trusted. Investment fraud is a big problem here in Utah, largely because our close-knit communities are a prime target for “affinity fraud.” Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake. It’s heartbreaking.
I have seen people who borrowed money against their homes or liquidated retirement accounts in order to fund risky investments based on pitch by someone they trusted. Unfortunately by the time they call me, the money is long gone – and so is the person who took the money. Because I specialize in helping people recover losses in investment fraud cases I often get asked for advice on how to avoid needing me. So, at the risk of all my work drying up, here is my TOP TEN ways to avoid investing in a financial scam:
10. Slow down. According to the Insider Monkey blog, many people invest after only hearing the pitch; watch out for promoters who try to commit you on the spot. Don’t do it! Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy. Be very wary of aggressive sales pitches and deadlines. Ask the hard questions before you hand over your money, not after.
9. Do your homework. Run a simple Google search on the company and its managers, or the individual. If it involves a company, ask for a private placement memorandum and company financials. Hire an attorney to evaluate the investment and help you perform due diligence. Attorneys have access to court databases to look for lawsuits and bankruptcies. Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.
8. Hire an attorney. Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up. A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes. Your lawyer can review the offering materials and help you understand what the risks are. Hiring a good attorney up front is an investment in your investment.
7. Get it in writing. I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake. Don’t do it! If things go bad later, proper documentation will be critical to me in my efforts to get your money back. The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired. (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM). Take the time to review it before you invest. It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things. If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.
6. Beware of guarantees. If anyone tells you that your investment is “guaranteed” that should cause some you concern. All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back. Even if you are approached to loan money and get a promissory note that is usually still considered to be an investment, and such loans can be very risky if not properly secured. If you are told that the loan or investment is “secured” hire an attorney to document the security interest and verify the collateral. (See Number 8.)
5. Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals. This could be an article all by itself. Generally, avoid anyone who credits a highly complex or secretive investing technique or touts unusual success. Legitimate professionals should be able to explain clearly what they are doing and how they make money. And if the individual is really making as much money with their strategy as they say they are, they shouldn’t need yours. These types of “alternative” investments nearly always involve extremely high risk, despite what you are told.
4. Work through licensed stock brokers or investment advisors. Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell you the investment, which regulator issued that license and whether the license has ever been revoked or suspended. A legitimate securities salesperson must be properly licensed under most circumstances. If you have any questions contact the Utah Division of Securities at (801) 530-6600.
3. Don’t invest with friends and neighbors. It may seem like doing business with someone you know and trust would be safer, but that is simply not true. All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good. Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.
2. Keep church out of investing. If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out! Church callings and temple worthiness are not relevant to investment decisions, so beware of those who bring these issues up in an investment pitch.
1. If it sounds too good to be true it probably is. If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out. The fact that others may have been getting their promised returns does not mean you will. All Ponzi Schemes eventually implode, and you may be left holding the bag.
Note: I wrote this article for The Enterprise and it was published in their July 2014 issue. Because their content is only available to subscribers I am posting it here.
Copyright 2014 by Mark W. Pugsley. All rights reserved.
*This article is intended to address private investments, not those made through a licensed stock broker or registered investment advisor.