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How to Spot a Con Artist
This investor bulletin was initially prepared and published by the North American
Securities Administrators Association (NASAA), an international regulatory association in
which The Manitoba Securities Commission is an active member. It has been amended to
reflect Canadian content.
Investing in securities is risky enough without worrying about whether your salesperson
is out to fleece you. To be an informed investor, you must know what danger signs to look
for. Some are subtle, and some are easier to spot.
Rule Number 1: Con Artists Do Not Like To Be Found
Con artists know that being themselves hurts business. Effective con artists must disguise
their true motives. Whether your first contact with the con artist is through an
unsolicited telephone call or a stranger ringing your doorbell, the con artist takes great
pains to look, sound and speak like you or me. Often, con artists like to blend in with
others in your group whether that group be political, community (such as the local senior
center), religious or other. They quickly get to know a lot of people in the group so they
can count on this common bond to spread the word about their questionable investments and
reel in unsuspecting investors.
Rule Number 2: Con Artists Dress For Success
Even though con artists would like you to believe that they are "just plain
folk," they are smart enough to realize that this alone will not sway you to part
with your money. They work very hard to come across as smooth, professional and
successful. Con artists may dress like they are wealthy and work out of impressive looking
offices. If your only contact is by mail, the office may bear a prestigious sounding
address. Often, this is nothing more than a mail drop. Your best bet is to look behind the
surface and do some serious investigating before you part with your money.
Rule Number 3: Con Artists Often Push Poorly Understood
Financial Products
Today, a variety of institutions, from banks to brokerage firms to financial planners,
offer a wide range of financial products. With such a confusing mix to choose from, it is
no wonder that many people turn to financial advisers for guidance. Con artists know this
and stand ready to assume full responsibility for your investment decisions. Don't let
them! When it comes to your money, think things through for yourself after getting all the
facts. Never give someone control over your purse strings just because you think you are
too old, young or financially inexperienced. If you really need help, only deal with
financial advisers, broker-dealers or financial institutions with a proven track record.
Con artists also appeal to the dreamer in you. Many people secretly believe that
Horatio Alger's rags-to-riches story can become a reality for them -- if only they get the
right break. To them, investing in untested technologies and cutting-edge products before
anyone else does is a sure-fire way to make money. International instruments such as
letters of credit supposedly issued by foreign banks may spell stability for some people.
Con artists sabotage your dreams. They promise you the investment chance of a lifetime
without giving you any meaningful written information on the product or the pitfalls
involved.
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Rule Number 4: Con Artists Bring Out The Worst In You
Skilled con artists can bring out your worst traits, particularly greed, fear, and
insecurity. Fear comes into play when the con artist warns you that complaining about a
failed investment to the government may result in your spoiling it for others or
"rocking the boat." Con artists try to make you feel inadequate if you don't
believe them. In addition, con artists know how to make you believe that if you lack
confidence in them, this is a personal slight to their abilities. If you find yourself
making investment-related decisions based only on your emotions, watch out!
Rule Number 5: Con Artists Are Fair Weather Friends
Before you invest, con artists are very friendly. They take a personal interest in you out
of the blue. They call back when they promised they would. Each time, they tell you even
more good things about the investment. You may feel you're being pressured into investing.
You are. Face it. Despite his or her kind words, the con artist will do anything in his or
her power to make a sale. In fact, the contacts may become so repeated that you may wish
that your first contact had been your last. 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 your investment, this may signal danger.
Rule Number 6: For Every Silver Lining, There Is A Cloud
Every investment involves risk. But to hear a con artist explain it, an investment may
sound too good to be true. If it sounds too good to be true... it is. Trust
your inner voice if you hear claims like these:
- "I just got a hot tip from an inside source that this stock will go through the
roof."
- "The rumor on the Street is that this deal is ready to take off."
- "Your return is guaranteed. There's no way you can lose money."
- "Gotta get in on the ground floor now or you'll be left out in the cold. In fact,
we'll send a messenger over tomorrow to pick up your check." (Con artists often use
this device to avoid federal mail fraud charges.)
- "Where else can you earn such a large return? Not in CDs 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."
Be especially careful if the salesperson downplays any downside or denies that risk
exists. Con artists usually are not very good at answering important questions. Watch out
if the salesperson becomes reluctant to provide information on the following:
- 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, where he or she is calling from, who he or she works for, his or
her background and what commission or other compensation he or she will receive
- The salesperson's connection with the venture and any affiliates
In addition, be wary
if the salesperson doesn't ask you questions about your past investment experience and
your ability to withstand risk. Even if the salesperson does ask a few related questions,
take heed if you get the sense that he or she is merely going through the motions.
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Rule Number 7: Watch Out For The Man From P.O.N.Z.I (Pay-Out
now, Zero Imminent)
No self-respecting con artist would actually admit that he or she was involved in a Ponzi
scheme. 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 part of this century. 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. Ultimately, the
authorities discovered that there weren't enough coupons in circulation to support Ponzi's
schemes. Ponzi was imprisoned in Massachusetts and then deported to Italy. The scheme he
created, however, continues to survive in many forms.
In a typical Ponzi scheme, large returns are paid to initial investors out of the funds
of later investors. Not only does this give the first investors confidence in the deal,
but it motivates others to invest. Unfortunately, the later investors lose all or most of
their money to the con artist. If you are promised high, guaranteed profits and given no
written explanation concerning the investment vehicle, the promoter's background or the
risks involved, be careful. A Ponzi scheme may be at work. Ponzi operators also tend to
persuade you to "roll over" your "profits" into still another
investment - so your return only ends up being on paper.
Rule Number 8: Steer Clear Of Pyramid Schemes
Pyramid schemes are a variation of the Ponzi scam. Think of a pyramid. Money is collected
from people on the bottom to pay off other individuals farther up the pyramid. As more
people invest, new pyramid levels are created, and your position in the pyramid rises. In
theory, you would be entitled to more money. Many times, you must also buy a product to
join.
However, unlike a true multi-level marketing plan, selling the product is less
important than recruiting others to join the network. Ultimately, there comes a time when
no new money flows in. When this happens, the pyramid collapses.
Tips On Not Falling Prey To A Con Artist
Avoiding being hurt by a con artist is as easy as doing your homework -- before you
invest.
- Contact The Manitoba Securities Commission to see if the investment vehicle and the
person selling it are registered.
- The Manitoba Securities Commission will also be able to tell you if the salesperson has
a disciplinary history, that is, whether any civil, criminal or administrative proceedings
have been brought against him or her.
- Contact your local Better Business Bureau to see if any complaints have been filed
against the venture's promoters or principals.
- Deal only with financial advisers, broker-dealers or financial institutions having a
proven track record. Check The Manitoba Securities Commission list of Registered Companies.
- Ask for written information on the investment product and the business. Such
information, including financial data on the company and the risks involved in the
investment, is contained in a prospectus. Read it carefully.
- Don't take everything you hear or read at face value. Ask questions if you don't
understand, and do some sleuthing for yourself. If you need help in evaluating the
investment, go to someone independent whom you can trust such as an attorney or an
accountant.
- Steer clear of investments touted with no downside or risk.
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