There is one thing that all investment scams have in common - they're in little danger of disappearing any time soon. Given their global scope and usually untraceable origins, law enforcement and regulators can often only warn investors to be careful. In other words, it's up to you to be your own first line of defence.
Experienced investors like to think they can see through the schemes, however, a recent study by the U.S. National Association of Securities Dealers (NASD) found that the most likely fraud victims were also the most financially literate and investment savvy. Their profile of the typical victim was a college-educated, married man with an above-average income.
To be fair, it's not just greed to blame. Fraudulent schemes are becoming more difficult to recognize. The Canada Revenue Agency (CRA) recently issued an investor alert warning about offshore investment tax-shelter schemes that are being promoted in Canada. It describes such schemes as "appearing legitimate" but in reality are far from it.
The scheme works this way: promoters claiming to represent an investment organization entice investors to participate in a tax shelter that promises to yield high returns from offshore investments. Investors are encouraged to raid their RRSP's for funds and told they can do so without paying tax. Investors are even told that they arrange an investment loss that could be used to generate a hefty tax refund.
In the end, promoters take the cash and the "investors" are left with not only a loss that cannot be claimed, but also a new income tax liability arising from the withdrawn retirement savings funds.
As well, the Internet has breathed new life into the classic "pump-and-dump" schemes where promoters "pump" a penny stock they have a position in and as soon as the new investors begin buying they "dump" their shares.
A more alarming type of fraud comes in the form of e-mails that appear to be from your bank or brokerage firm asking you to immediately reconfirm information. This is called "phishing" and it is an expedition to trick investors into revealing their confidential account password, bank account numbers and credit card information. Regulatory bodies have issued warnings recently that computer fraud is rising with hackers using this technique to get online access to investor accounts.
Some points to help protect you from becoming a victim of investment fraud:
Don't deal with strangers. Start by requesting references and information about the representative's company before conducting business with them. Be especially wary about those who want to be your new best friend and want to make you rich in the bargain. Also, never give out confidential information to an unknown telephone caller or unsolicited email request;
Check it out. Research any investment opportunity before making a decision. Legitimate tax shelters should be reviewed and approved by the Canada Revenue Agency. Legitimate securities will be listed on an established exchange with the company's published and audited financial statements easily available;
Wait for the pitch. If an investment is being presented as guaranteed to increase in value; if you're being encouraged to act quickly, if you're being told to take advantage of insider information - there's probably a scam going on;
Get a second opinion. If something sounds too good to be true, it is. Always get a third party opinion from someone you know you can trust. Your accountant, lawyer or financial advisor will be able to check out the legitimacy of any investment opportunity that presents itself and advise you as to its quality based on investment your objectives.
Shea Sanche is an independent financial advisor with Raymond James Ltd. in Thompson. His column appears every third Friday. You can contact him with suggested topics or questions by email at [email protected]. Raymond James Ltd. is a member of CIPF.
