How to spot a con artist

How to spot a con artist

Investing in securities is risky enough without worrying about whether your salesperson is taking advantage of you. To be an informed investor, you should know the danger signs. Some are subtle, and others are easier to spot.

For information about con artists select from the options below.

 

• Characteristics
• Claims con artists use
• Ponzi schemes
• Pyramid schemes
• Tips to protect yourself

 

Characteristics

Con artists like to blend in

Con artists know that being themselves hurts business. Effective con artists disguise their true motives. Whether your first contact with the con artist is through an unsolicited telephone call from ringing your doorbell, the con artist tries to look, sound, and speak like your friend. They like to blend in with your group, whether that group is political, community-based (such as the local senior center), or religious. They quickly get to know as many people in the group as possible so they can count on a common bond to spread the word about their questionable investments.

Con artists dress for success

Con artists work very hard to come across as smooth, professional, and successful. They may dress like they are wealthy and have impressive-looking offices. They may have addresses in impressive buildings, even if they are nothing more than a mail drop. Look behind the surface and do some serious investigating before you hand over your money.

Con artists often push poorly-understood financial products

Institutions, from banks to brokerage firms to financial planners, offer a wide range of financial products. With so many options to choose from, it is no wonder so many people turn to financial advisers for guidance. Con artists know how complicated the investment market can be and offer to assume full responsibility for your investment decisions. Do not be tempted to hand all of the decisions over to someone else. When it comes to your money, think things through for yourself after getting all the facts. If you need assistance, deal with financial advisers, broker-dealers, or financial institutions with a proven track record.

Con artists also appeal to people’s hopes and dreams. To them, investing in untested technologies and cutting-edge products before anyone else does is a sure-fire way to make money. Con artists actually sabotage people’s dreams. They promise the chance of a lifetime without giving any meaningful written information about their products or the risks involved.

Con artists bring out the worst in people

Skilled con artists can bring out people’s worst traits, particularly greed, fear, and insecurity. They might play on your fear, for example, by warning you that complaining to the government about a failed investment may "rock the boat" and spoil things for others. Con artists try to make people feel inadequate for ignoring their advice and foster guilt in people for questioning their abilities. Be careful not to make investment-related decisions based only on emotions.

Con artists are fair weather friends

Before you invest, con artists are very friendly and may take a personal interest in you, out of the blue. They call back when they promise they will, often telling you more and more good things about the investment. You may feel you are being pressured into investing, and you likely are. Despite his or her kind words, the con artist will do anything to make a sale. Too often, however, once you have invested your money, contact with the con artist dwindles and then stops altogether. If you cannot get answers to your questions following an investment, it may be a sign of danger.

 

Claims con artists use

For every silver lining, there is a cloud

Every investment involves risk. If an investment sounds too good to be true… it is. If you hear claims like these, you may be dealing with a con artist:

• "I just got a hot tip, from an inside source, that this stock will go through the roof."
• "The rumour on the street is that this deal is ready to take off."
• "Your return is guaranteed. There is no way you can lose money."
• "Gotta get in on the ground floor now or you'll be left out in the cold. We'll send someone over tomorrow to pick up your check."
• "Where else can you earn such a large return? Not in GICs or in a savings account."
• "In just a short while, your profits will come rolling in."
• "This deal is so-great, I invested in it myself."
• "If this doesn't perform as I just said, we'll refund your money, no questions asked."
• "Everyone else that invested in this did very well."

Con artists are not usually very good at asking or answering important questions. If the salesperson does not ask questions about your past investment experience or your ability to withstand risk, it may be a sign. In addition, if the salesperson you are dealing with is reluctant to provide information on the following, you may be dealing with a con artist:

• The background, educational history, and work experience of the deal's promoters, principals, or general partners.
• Information on whether your investment monies will be segregated from other funds available to the business.
• Written information on the business' financial condition, such as a balance sheet and bank references.
• The prior track record of the business and its principals.
• The salesperson's name, location, employer, background, and commission or other compensation rates.
• The salesperson's connection with the venture and any affiliates.

 

Ponzi schemes

The Ponzi scheme was named after Charles Ponzi, an Italian immigrant who, after being jailed in Canada for fraud, moved to Boston in the early 1900s. Ponzi solicited people to invest in International Postal Reply Coupons, which could be redeemed for stamps. He promised them a 40 percent return in just 90 days. Authorities eventually discovered that Ponzi was simply using the money from new investors to pay to previous investors and that he had defrauded people of millions of dollars. He was imprisoned in Massachusetts and then deported to Italy.

The Ponzi scheme continues to survive in many forms. Typically, however, large returns are paid to initial investors out of the funds of later investors. Not only does the structure build confidence in the initial investors, but encourages new people to invest. Ponzi operators also tend to persuade initial investors to "roll over" their "profits" into new investments, so the return ends up being only on paper. Unfortunately, the later investors typically lose all or most of their money to the con artist.

If you are promised high, guaranteed profits, but given no written explanation about the investment, the risk involved, and know little about the promoter's background, a Ponzi scheme may be at work.

 

Pyramid schemes

Pyramid schemes are variations of the Ponzi scam. Money is collected from people on the bottom in order to pay individuals farther up the pyramid. As more people invest, new pyramid levels are created, and the previous investors rise in the pyramid. In theory, investors are entitled to more money the more times they rise through the levels.

Even though participating in a pyramid scheme often involves the requirement to purchase some product, selling the product is less important than recruiting others to join the network. Ultimately, there comes a time when no new money flows in, and the pyramid collapses.  Steer clear of pyramid schemes!

 

Tips to protect yourself

Avoiding being hurt by a con artist can be as easy as doing your homework before you invest:

• Contact FCAA, or use the Registrant Search, to see if the investment product and the person selling it are registered.
• FCAA will also be able to tell you if the salesperson has a disciplinary history, including whether any civil, criminal, or administrative proceedings have been brought against him or her.
• Ask for written information on the investment product and the business. Information including financial data on the company and the risks involved in the investment is contained in a prospectus. Read it carefully.
• Do not take everything you hear or read at face value. Ask questions if you do not understand any part of the investment. If you need help in evaluating the investment, go to someone independent you can trust, such as a lawyer or accountant.
• Steer clear of investments touted with no downside or risk.