Avoiding Investment Fraud | Marc LLP

We are going through difficult financial times: inflation and interest rates are high, stock markets have collapsed dramatically and the supply chain seems to be broken. Even the most respected businessman can struggle financially when fortune turns against him. In this case, they could try to make an investment that will reverse their fortunes. Aren’t we all?

Investors are inherently willing to take some risk – otherwise they wouldn’t invest. However, when making an investment you should take the necessary steps to ensure that the person managing your funds is making a legitimate investment on your behalf.

History is littered with investment fraud. Many make the news, but many others don’t. Understanding past investment scams can help current investors avoid them in the future. Some of these cases are truly amazing, like those of Ponzi schemers like Bernard Madoff1 and pump-and-dump stock scammers like Jordan Belfort2. At the beginning of the pandemic, some scammers even took advantage of the need for PPE (personal protective equipment), scamming individuals, hospital systems and even governments.3

Many scams succeed for a common reason: the investor didn’t ask enough questions or request adequate documentation before investing.

Consider the three elements of noted criminologist Donald Cressey’s fraud triangle: Print, opportunityand rationalization. For a scammer, bad economic times provide the pressure and the need to make money provides the rationalization. Your investment presents a potential opportunity for scammers.

So what can be done to protect you as a potential investor before making an investment?

1. Don’t invest more than you can afford to lose.

A comprehensive financial plan for your investment portfolio should start with risk-averse securities. Private equity or other risky investments are not for an investor who is just starting out.

2. Take your time.

Many scams depend on a sense of urgency. Getting an unwanted call or email urging you to commit before you have time to make an informed decision is a red flag.

3. Ask for information.

Before you invest, take a close look at the investor’s or entrepreneur’s resume, investment prospectus, and financial records, if available. Do they have a strong accounting team? (If the accounting team is an afterthought, that’s a red flag!) Do they understand manufacturing and distribution channels? Do you have the equipment to be successful? If this is a new investment area, who will help provide expertise? What other investors are already on board?

4. Think critically about the business model.

Does it make sense? If they claim a hot new product or emerging market, what solid evidence is there of its success? Don’t be fooled by snazzy-looking websites or technobabble – a beautiful website is easy to create and not proof of a rock-solid business.

5. Use your resources.

Go to your state’s Secretary of State’s website and search for the company. How long has it been in operation?

Remember the golden rule of investing: If it sounds too good to be true, it probably is. There is no guaranteed return. Researching an investment opportunity is very important and it is better to be safe than sorry.

Additional Resources

  1. https://www.investor.gov/introduction-investing/getting-started/researching-investments
  2. https://www.sec.gov/reportspubs/investor-publications/investorpubsavoidfraudhtm.html


  1. https://www.investopedia.com/terms/b/bernard-madoff.asp
  2. https://www.investopedia.com/investing/who-is-jordan-belfort/
  3. https://www.propublica.org/article/ppe-covid-scams-fraud-nitrile-gloves

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