3 Simple Steps to Make Sure You Don’t Fall for Investment Fraud

Mary Hunt gives some simple tips to help avoid investment fraud. Light And Dark Studio/Shutterstock

Reportedly, billionaire oil tycoon Robert Belfer has been affected by investment fraud in three major scandals: Enron’s corruption, Bernie Madoff’s Ponzi scheme, and now the collapse of cryptocurrency exchange FTX.

Belfer, 87, has survived multiple financial frauds, including losses of tens of millions of dollars from Madoff and billions of dollars from Kenneth Lay’s energy company. As reported by the Financial Times, Belfer is now at risk of losing a total of $34.5 million in Sam Bankman-Fried’s cryptocurrency company.

This begs the question: If even wealthy investors with teams of advisers can become victims of fraud, what chance do everyday people have to do any better? The answer is to manage our own personal finances. That doesn’t mean we should never seek professional guidance. It means we should never assume we, as nonprofessionals, aren’t capable of participating and making decisions on our own behalf.

Here are three strategies to follow so you don’t fall prey to investment fraud.

No Hasty Moves

Even seasoned investors can fall for the “fear of missing out.” FTX reeled in many individuals who had no idea how cryptocurrencies operate. They assumed if the big cats were all in, it had to be legit.

If you feel concerned that an investment isn’t in your area of expertise, that’s a positive sign. It’s a clear indicator that you should steer clear. Here’s my personal rule of thumb: If I can’t explain an investment in 50 words or less, I don’t have sufficient information to make a reasoned decision.

Scam artists hope we'll abandon all reason and careful examination to accumulate wealth. “Act now! Get in on the bottom floor! Who knows how long this will last?” Time is your greatest asset in investing, while haste is your worst enemy.

Check the Registration

While particular forms of fraud may be undetectable, most offer recognizable indicators if we'll search for them.

Before making any investment, inquire with which financial institution it’s registered. Next, go to that state’s official website to verify and determine if this is legitimate.

It’s also crucial to verify if an individual or company has a license to sell investments, which is mandatory in most states.

If you need assistance verifying a company or person offering an investment, you can easily contact the Securities and Exchange Commission’s Office of Investor Education and Advocacy.

Get It in Writing

For all legitimate investment opportunities, you should take your time, review the documentation, and thoroughly educate yourself on the product. Don’t make any decisions based on verbal descriptions, explanations, and promises. Get it all in writing.

The documentation should be readily available, clear, and understandable if a company aims to attract investors. Exercise caution if you’re puzzled or detect unrealistic, unbelievable claims that you can’t independently verify. Fraud salespeople count on exploiting your emotions, not guiding you through rational thought.

One last thing: Always remember that no credible equity investment ever guarantees a profit.