Reducing the Risk of Investment Fraud – SEC Recommendations

Church Law and Tax 2004-03-01 Reducing the Risk of Investment Fraud – SEC Recommendations Richard

Church Law and Tax

Reducing the Risk of Investment Fraud – SEC Recommendations

As you may have read through cases summarized in other articles, you may still be amazed that anyone could have fallen for investment scams. But the truth is that in each case church members and leaders found the investment scheme to be legitimate, and did not realize that they were being victimized. Are there specific steps that church members and leaders can take to reduce the risk of financial fraud? Fortunately, the answer is yes. A first step is to be familiar with the four specific kinds of investment fraud described above (pyramid schemes, Ponzi schemes, Nigerian investments, and prime bank investments). A second step is to review the actual cases summarized above. Third, review the following recommendations from the United States Securities and Exchange Commission.

(1) if it sounds too good to be true, it is

High-yield investments tend to involve extremely high risk. Never invest in an opportunity that promises “guaranteed” or “risk-free” returns. Words like “guarantee,” “high return,” “limited offer,” or “as safe as a C.D.” may be a red flag. No financial investment is “risk free” and a high rate of return means greater risk. Watch out for claims of astronomical yields in a short period of time. Be skeptical of “off-shore” or foreign investments. And beware of exotic or unusual sounding investments, especially those involving so-called “prime bank” securities. Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you’ll get substantially more could be highly risky. And that means you might lose money.

(2) “guaranteed returns” aren’t

Every investment carries some degree of risk, and the level of risk typically correlates with the return you can expect to receive. Low risk generally means low yields, and high yields typically involve high risk. If your money is perfectly safe, you’ll most likely get a low return. High returns represent potential rewards for folks who are willing to take big risks. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” Don’t believe it.

(3) check out the company before you invest

If you’ve never heard of a company, broker, or adviser, spend some time checking them out before you invest. Most public companies make electronic filings with the SEC that can be inspected on the SEC website. Some smaller companies don’t have to register their securities offerings with the SEC, so always check with your state securities regulator. You’ll find that telephone number in the government section of your phone book. Or call the North American Securities Administrators Association (NASAA) at (202) 737-0900. Many online investment scams involve unregistered securities. One simple phone call can make the difference between investing in a legitimate business or squandering your money on a scam.

Your state securities department can tell you whether the person pushing the investment opportunity has a disciplinary history by checking the Central Registration Depository (CRD). You can also obtain a partial disciplinary history by contacting NASD’s toll-free public disclosure hot-line at (800) 289-9999 or visiting their website at

If a promoter only lists a P.O. box, you’ll want to do a lot of work before investing your money.

(4) if it is that good, it will wait

Scam artists usually try to create a sense of urgency, implying that if you don’t act now you’ll miss out on a fabulous opportunity. But savvy investors take time to do their homework before investing. If you’re being pressured to invest, especially if it is a once-in-a-lifetime, too-good-to-be-true opportunity that “just can’t miss,” just say “no.” Your wallet will thank you.

(5) understand your investments

Scam artists frequently use a lot of big words and technical-sounding phrases to impress you. But have faith in yourself! If you don’t understand an investment, don’t buy it. If a salesman isn’t able to explain a concept clearly enough for you to understand, it isn’t your fault. Don’t make it your problem by buying!

(6) beauty isn’t everything

Don’t be fooled by a pretty website-they are remarkably easy to create.

(7) is the person offering the securities licensed?

Find out if the person or firm selling the investment needs to be licensed. Call your state securities regulator and ask whether the person or firm is licensed to do business in your state and whether they have a record of complaints or fraud. You can also get this information by calling NASD’s public disclosure hotline at (800) 289-9999.

(8) be especially skeptical of investing via the Internet

You should be skeptical of investment opportunities you learn about through the Internet. When you see an offering on the Internet (whether it’s on a company’s website, in an online newsletter, on a message board, or in a chat room) you should assume it’s a scam until you’ve done your homework and proven otherwise. Get the facts before you invest, and only invest money you can afford to lose.

(9) be skeptical of offshore investment opportunities

Watch out for offshore scams and investment opportunities in other countries. When you send your money abroad, and something goes wrong, it’s more difficult to find out what happened and to locate your money.

(10) call the SEC

If you have any doubts about an investment opportunity, call the SEC or your state securities department. You can get the telephone numbers by visiting their websites.

10 Questions to Ask Before You Invest

The SEC also suggests that prospective investors ask the following 10 questions before investing funds:

  1. Is the investment registered with the SEC and the state where I live?
  2. Is the person recommending this investment licensed with my state securities agency? Is there a record of any complaints about this person or the firm he or she works for?
  3. How does this investment match my investment objectives?
  4. Will the sales representative send me the latest reports that have been filed on this company?
  5. What are the costs to buy, hold, and sell this investment? How easily can I sell?
  6. Who is managing the investment? What experience do they have? Have they made money for investors before?
  7. What is the risk that I could lose the money I invest?
  8. What return can I expect on my money? When?
  9. How long has the company been in business? Is it making money, and if so, how? What is their product or service? What other companies are in this business?
  10. How can I get more information about this investment, such as audited financial statements, annual and quarterly reports, a prospectus?
  11. Learn to Identify The Telltale Signs of Fraud
  12. The SEC has provided the following telltale signs of securities fraud:
  13. Pressure to invest before you’ve had an opportunity to think about or investigate the stock or investment
  14. Sales people offering “inside” or “confidential” information
  15. Claims of a “once-in-a-lifetime opportunity” or a “limited time offer”
  16. Promises of spectacular profits or “guaranteed” returns
  17. Assurances that the investment is “risk-free” or “as safe as a certificate of deposit”
  18. Reluctance – or outright refusal – to send you written information about the investment
  19. © Copyright 2004 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m85 m46 m18 c0204
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

ajax-loader-largecaret-downcloseHamburger Menuicon_amazonApple PodcastsBio Iconicon_cards_grid_caretChild Abuse Reporting Laws by State IconChurchSalary Iconicon_facebookGoogle Podcastsicon_instagramLegal Library IconLegal Library Iconicon_linkedinLock IconMegaphone IconOnline Learning IconPodcast IconRecent Legal Developments IconRecommended Reading IconRSS IconSubmiticon_select-arrowSpotify IconAlaska State MapAlabama State MapArkansas State MapArizona State MapCalifornia State MapColorado State MapConnecticut State MapWashington DC State MapDelaware State MapFederal MapFlorida State MapGeorgia State MapHawaii State MapIowa State MapIdaho State MapIllinois State MapIndiana State MapKansas State MapKentucky State MapLouisiana State MapMassachusetts State MapMaryland State MapMaine State MapMichigan State MapMinnesota State MapMissouri State MapMississippi State MapMontana State MapMulti State MapNorth Carolina State MapNorth Dakota State MapNebraska State MapNew Hampshire State MapNew Jersey State MapNew Mexico IconNevada State MapNew York State MapOhio State MapOklahoma State MapOregon State MapPennsylvania State MapRhode Island State MapSouth Carolina State MapSouth Dakota State MapTennessee State MapTexas State MapUtah State MapVirginia State MapVermont State MapWashington State MapWisconsin State MapWest Virginia State MapWyoming State IconShopping Cart IconTax Calendar Iconicon_twitteryoutubepauseplay