Even Professional Investors May Not Spot a Fraud

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Red FlagScarcity/Phantom Riches

Even well-educated and experienced investors can find it difficult to avoid investment fraud.

Steve Sampler knew a thing or two about finance when he first heard about a promising opportunity to invest in an oil well. A licensed stockbroker with years of investing experience, he knew how markets work and how to analyze companies. But the deal turned out to be a scam, and the $40,000 he invested vanished. "If it can happen to me," Sampler said, "it can happen to anyone."

Research shows he is right. Contrary to stereotypes, investment fraud victims are typically college-educated males, with above-average income and financial knowledge. They also tend to be open to listening to new ideas or sales pitches. As recent high-profile investment frauds underscore, Sampler is not alone in falling for a phony investment pitch.

So how did someone as educated and experienced as Sampler fall for the investment scam? The con man used a fraud tactic called "scarcity," creating a false sense of urgency by telling Sampler that he had to move fast because there were only a few units left. Then, the scammer promised he would make ten times his investment, dangling the prospect of wealth in another tactic known as "phantom riches."

Before these fraud tactics were even put into play by the scammer, he used one basic and successful trick—getting personal with the victim.

"Everyone has a tendency to trust people," Sampler said. "Once you get to know them particularly, you want to trust them. You don’t want to think badly of them."

Steve Sampler was a victim of investment fraud—but you don’t have to be. So before you even think about listening to a sales pitch, ask the seller if he or she is registered with FINRA or the Securities and Exchange Commission, and check out what they tell you. Steve Sampler was a victim of investment fraud—but you don’t have to be.  

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