The Watchdog Report

By Comptroller General Richard Eckstrom

 

 

 

Today’s investors and savers are facing a growing list of complicated financial scams.  Dishonest promoters seem to be constantly devising new ways to cheat unwary investors.  Sadly, even some well-known schemes continue to be effectively used to cheat people of their hard-earned savings. 

 

In South Carolina, investors and savers lose millions of dollars every year to investment fraud.  Education and awareness are the first lines of defense against this danger.   A recent national survey reveals that the most common investment scams, schemes, and scandals include affinity fraud; senior investment fraud; hollow promissory notes; high-yield investment schemes; insurance fraud; and ponzi schemes.

 

In the next few weeks, this column will cover explanations of these common types of frauds, particularly those against vulnerable senior citizens in South Carolina.  We’ll start by offering general guidelines on how to keep from becoming a victim of dishonest financial schemes.

 

We’ve all heard the advice “if it sounds too good to be true, it probably is.”  Never is this phrase more accurate than with investment schemes.  Always be leery of investment opportunities that are sold as having no risks or as being rock-solid safe.  Such claims are dishonest because all investments have the risk of loss. 

 

Remember, if an opportunity promises higher than normal market returns, or sounds too good to be true, you should immediately be extremely suspicious.  Never take what you are told about such golden opportunities at face value.  You should always first seek the advice of a financial expert who is completely independent of the promoter of the so-called “golden opportunity” before investing any money.

 

Check to see if the investment is properly registered with state securities regulators.  Usually these regulators work for the state attorney general.  Most investment offerings must be registered if they are publicly advertised and are being offered to more than just a few people. 

 

Be aware though that even legitimate or properly registered offerings can be used to take advantage of unsuspecting investors. Many schemes start out in otherwise legitimate enterprises.  Remember that it takes only one dishonest or desperate company official to turn a successful enterprise into a serious investment risk.

 

State securities regulators also have access to disciplinary histories of brokers and their representatives.  With a simple phone call you can learn of past criminal, civil, or administrative proceedings involving a company or its salesmen who are selling investment products.

 

Most importantly, deal with independent financial advisers, broker-dealers, or financial institutions with proven track records.  Ask for written information on the investment product and the business.  Such information, including financial data on the company and the actual investment risks involved, is contained in a document called a “prospectus.”  Always thoroughly and carefully review this document.  If something is unclear or unfamiliar, ask questions and insist on clear answers from either the company offering the investment or from a qualified financial adviser. 

 

Above all else, use common sense.  Be a watchdog, do your homework and avoid becoming a victim.  Report suspicious activities to law enforcement or to state securities regulators, especially if the promoter resorts to pressuring you.  These efforts on your part can discourage securities fraud and perhaps can stop unscrupulous or desperate promoters before they hurt too many other victims.