MONEY MANAGEMENT
A column on personal finance prepared by the Virginia Society of Certified Public Accountants
CPA CHECKLIST TO PROTECT AGAINST INVESTMENT FRAUD
(May 5, 2003) - "No risks. Fast profits. Upfront money." If an investment opportunity is described to you in these terms, don't part with your money, advises the Virginia Society of CPAs. Americans are losing billions of dollars a year to fraudulent investments, and these bogus opportunities come in many guises.
Pyramid scams attract unknowing investors with promises of huge profits in a short period of time. This scheme uses cash from new recruits to make payments to early investors who then encourage others to participate. "Affinity" con artists sell fake investments by approaching foreign-speaking individuals in their own language. People are often more trusting of someone with the same background.
"Pump and dump" scams drive up stock prices by providing "insider" information. As soon as buyers increase a stock's price, the insiders or paid promoters sell their shares, quickly benefiting from the run up in price at the expense of unknowing investors. And, of course, there are numerous "exciting, can't miss, no risk, once-in-a-lifetime" opportunities to make money in prime bank interests, offshore investments, oil and gas leases, gemstones, and many other exotic sounding investments.
Here is some advice from CPAs that can help protect against fraudulent investment schemes:
Be wary of high-pressure telemarketers.
Telemarketing is a legitimate way for businesses to contact potential customers and this holds true for many investment firms as well. However, you should be wary of aggressive cold callers who tell you to "act now, before it's too late!" High pressure pitches are usually used to get you to buy an investment before you have had a chance to understand and research it. Chances are these individuals are trying to fill their own pockets with your money. The elderly should be particularly cautious. Some swindlers prey on older individuals eager to have someone to talk to.
Make sure the investment is consistent with your needs.
Be sure that any investment presented to you meets your objectives. Before you put your money on the line, consider whether the investment makes sense for your age, long-term goals, liquidity needs, and tolerance for risk. If you don't understand what you are being sold, get professional advice from a CPA or don't make the purchase.
Take extra caution when investing over the Internet.
The Internet can be an excellent resource for investors-but it also can be dangerous. The Internet makes it easy for fraudsters to make their messages look credible. Without spending much time or money, anyone can build a Web site, send thousands of e-mails, and publish an official-looking online investment newsletter. While there certainly are legitimate ways to buy stock over the Internet, do your homework to be sure you're dealing with a genuine business engaged in a legitimate business venture.
Know whom you are dealing with.
Don't let appearances fool you. Fraud promoters often create the illusion of a successful business by renting office space, printing slick promotional materials, and issuing stock certificates. Never invest with an unfamiliar company until you've checked the Securities and Exchange Commission's EDGAR database (www.sec.gov) or your state's securities regulator to make sure the company is properly registered or legally exempt from registration.
In addition, before you sign up with a broker, investigate his or her background by contacting the National Association of Securities Dealers, Inc. (NASD). You can call the toll-free hotline at (800) 289-9999 or visit the Web site at www.nasd.com for information.
Be wary, too, of references provided by an unsolicited promoter. The person touting the investment may be a company insider or paid promoter hired to tell you that the firm's investments brought him or her enormous wealth. Also question any high profile names a promoter claims have come aboard. Even high profile investors have been swindled.
Obtain written financial information.
Before you invest, always obtain written financial information about the investment, such as a prospectus, annual report, offering circular, and financial statements. Take the time to read and understand these documents thoroughly. If you don't understand the information, hire a CPA to help you make sense of the numbers and disclosures.
Don't believe everything you hear.
Bad information and false news reports are plentiful. Before you act on information from neighbors, friends or an unknown Internet source, verify the facts by visiting the company's Web site or contacting its investor relations department.
Stay in charge of your money.
This is vital if you want to protect your financial future. Seek advice from a trusted financial advisor, such as your CPA, in developing an investment strategy that addresses your unique needs. Then, be sure to monitor your investments' performance regularly. Such vigilance is one of the most effective ways to protect yourself against fraud.
Ultimately, the best way to combat investment fraud is a strong defense, built on knowledge and a dose of skepticism.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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