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Avoid investment fraud

Recognize the signs

No matter how you choose to invest your money, a degree of risk exists. The greater the promise of riches, the riskier the investment, or it does not exist at all. Recognize and know the signs of an investment scam; it will save you money.

  • High rate of return, especially one that is better than similar investments.
  • A guarantee that the investment will not fail.
  • Insistence that the investment is available only for a short period of time.
  • Pressure to give them your money immediately and unconventionally: asking for a blank check, money order, a prepaid reloadable card, or even an electronic funds transfer.
  • The absence of any documents, particularly those that outline the investment, how it works, and how you will be paid.

Your best defense is asking a lot of questions. If you are not satisfied, walk away. Remember, if it sounds too good to be true, it is.

Top investment risks

Many investment opportunities are offered by legitimate financial professionals, and some of those opportunities can hold great promise. Remember: All investments carry risk. Before you commit your money, make sure the seller is licensed and the investment is registered.

Watch out for these risky investments, often sold without regard to what is suitable for you and, perhaps, by a con artist:

  • Self-directed IRAs. These allow you to invest in securities not typically offered, such as real estate, private tax liens, promissory notes, and even gold. However, you are responsible to research opportunities and avoid scams. Custodians and trustees of self-directed IRAs may have a limited duty to protect the owner and may not evaluate the quality, value, or legitimacy of an investment or its promoters. Use the following tip sheet to help inform your decision: The Self-Directed IRA: Know the facts. Get a second opinion
  • Gold. The scammer may promise “guaranteed” returns with a stake in an active or soon-to-be active gold mine that will bring quick riches. In reality, gold investments can be highly speculative and risky.
  • Oil and gas. The seller tells you the oil or gas wells in Texas or Oklahoma have excellent productivity. Be skeptical; these tend to be unsuitable for smaller investors who cannot afford the risk.
  • Promissory notes. Often pitched as personal loans with the promise of big returns, buyers may suffer deep losses if the notes are unregistered or fraudulent. Unregistered promissory notes are often covers for Ponzi schemes.
  • Ponzi schemes. A Ponzi pays early investors with funds from later investors, creating the illusion that everyone is making money. All end up losing all or most of their money. Members of religious, ethnic, or other groups with common interests are often targeted and are incredulous when they find "one of their own" has scammed them.
  • Real estate investment schemes: Legitimate real estate investments can be an important part of a diversified investment portfolio, but there are big risks. In particular, there have been problems with:
    • Non-traded real estate investment trusts (REITS).
    • Properties that are bank-owned, pending short-sale, or in foreclosure
    • Investments supposedly secured by an interest in real property that actually lack any remaining equity. If you are investing in real estate, do your own title search, make sure the trust deed is recorded, and know your position on the deed if the investment goes sour.
  • New technology. Schemers are good at touting the newest technology – all they need are a couple of “cutting edge” investors to get off the ground. The schemers may use a prototype called a “black box” to convince you to invest.

A good rule of thumb with any investment is if you cannot explain the investment, it is probably not good for you.

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