Whenever there is a stock market crash, such as in the COVID-19 stock market crash, fraud that has been hidden for years can come to the surface. This is particularly true for investment scams. This happened with Bernie Madoff. The stock market crashed, and people wanted access to their money. That was when they learned from the first time that the money they thought that they had safeguarded with Madoff was, in fact, just an illusion. It turned out that Madoff was running a plain old Ponzi scheme. When no new money was coming in to pay off old investors, Madoff’s multi-year Ponzi scheme finally came to light. The Coronavirus market crash will bring to light many investment wrongs and fraudulent or negligent conduct which has gone undetected during the great bull market. As long as investments were going up, many investors were not fully aware of unsuitable investments, improper margin risk , or fraudulent conduct.
Scams Can, and Do, Happen
Sadly, there are always going to be people who try to take advantage, who try to take shortcuts, who try to make an easy dollar, who try to cash in even if it means taking advantage of others. It does not matter whether you are a novice with finances or a very sophisticated investor. There are unscrupulous people out there, and when it comes to money, people often make the wrong, even criminal, choice.
Of course, that is the reason why we have laws, and why there are regulatory bodies like the Securities and Exchange Commission (“SEC”) or FINRA to try to protect investors from the unscrupulous practices of some investment brokers.
That said, it is infinitely better to “nip something in the bud” before it becomes a problem that requires using FINRA, filing a lawsuit, or calling the authorities. The way to avoid investment scams, then, is to keep a sharp eye out for those “red flags” that tell you that there is something fishy going on.
Below, we will discuss the 5 red flags of investment fraud that should help you separate those above-board investment brokers with those who might be trying to take advantage of your trust.
If, after reading this blog, you have additional questions on broker negligence or broker fraud, we invite you to contact broker fraud attorney Melanie Cherdack. Ms. Cherdack is a broker fraud attorney who understands the plight of those who were victims of investment fraud. As a former Wall Street attorney, she has “seen it all” when it comes to the schemes that investment brokers use to defraud their clients. We invite you to contact us today on our online contact form, or by calling 888-768-2499.
1. Promises of Unrealistic, Guaranteed or Excessive Returns.
This first red flag is an important one to keep in mind. It is just human nature to want to believe something when it comes to growing your finances, even if it sounds too good to be true. Even the most stable investments will fluctuate when the market is volatile or is in “bear market” territory as the market is in now.
So, when your investment advisor is actually making promises that your money will post consistently high returns, month after month, then you should run the other way. No investment other than perhaps a money market or CD is “risk-free” and such promises cannot be believed. Steer clear.
2. Curiously Complicated Strategies.
A scammer will often try to play on the aura of superior knowledge on a subject in order to convince an investor of his or her greater skill or expertise. In such cases, a stockbroker may say that its unique investment strategy is too complicated to explain. Indeed, they may add that their approach is so novel, so different from how the others do it, that it is the reason they can claim uncommon success.
Try not to be fooled by that pitch. For years, unscrupulous auto mechanics have been using their superior knowledge of cars to get us all to pay for unnecessary repairs. An investment broker telling you that they are not able to explain their investment strategy is a reminder that you need to look elsewhere or at least have another expert you trust verify their pitch.
3. Unregistered Investments.
Some investments, such as private placements and notes, are not required to be registered with the SEC or FINRA. An unregistered investment is generally a more risky one which requires that its purchaser meet certain financial thresholds to invest. This is called an “accredited investor.” Unregistered investments are not regulated the same was as registered ones and are often significantly more risky. Be wary of the unregistered investment.
4. Pressure in Making Quick Decisions
High-pressure tactics are a sure-fire red flag when it comes to investing your money. If you have ever been in the market for a used car, then you know to avoid those salespeople who push you hard to make a quick decision, and tell you that there are others ready to take the car in the next few hours if you don’t buy now.
You might see the same type of sales tactics with those who sell financial instruments as well. So, make a commitment to yourself not to work with those salespeople who put too much pressure on you to make quick decisions.
In fact, even if there actually is no fraud or wrongdoing going on, it is still not appropriate for a salesperson to push for a quick decision without giving you the time you need to review your options and decide. Invest in haste, and you may be sorry.
5. Borrowing Money to Invest.
The fifth red flag is when a broker recommends that you borrow against some other savings you have in order to make a particular investment. While margin loans are commonplace at brokerage firms, they are not suitable for everyone as margin accounts carry more risk to the investor and you may be forced to sell your stock to pay margin calls. Importantly, borrowing resources from your IRA or another retirement account to purchase stock is a particularly risky move. Should this be suggested by your broker, you want to say “thanks, but no thanks.”
If You May Be a Victim of Fraud, Call a Broker Fraud Attorney
Whether you suspect that your broker or financial advisor lied to you about the risks of a certain investment, or you suspect that your advisor engaged in self-dealing or other wrongful conduct, you need the help of an experienced broker fraud attorney to assist you. We invite you to contact attorney Melanie Cherdack.
Having been in the trenches as a former Wall Street attorney, broker fraud attorney Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk due to the actions of others.
Thus, if you have lost money due to broker fraud or simple broker negligence, it is crucial to hire a lawyer who fully understands this area of law. Former Wall Street securities attorney Melanie S. Cherdack represents individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States Contact us by filling out our online contact form or calling 888-768-2499.