Avoiding Investment Fraud
by James Marasco, CPA, CFE, CIA
Director, Corporate Services
StoneBridge Business Partners
Fraudulent investment schemes have been in the news both nationally (Bernard Madoff) and locally (Richard Piccoli in Buffalo).
Schemers resembling beloved grandfathers have stolen billions of dollars from individuals, not-for-profit organizations and company pension funds. Tough times increase the frequency of these schemes. Here’s how you can avoid becoming a victim.
Use common sense. Any investment deal that sounds too good to be true probably is. Think rationally, not emotionally. Markets fluctuate, so an offer of a “guaranteed return” (especially if the promised number seems high) is generally a scam unless the investment vehicle is an annuity product, managed by a well-established company. Investigate the investment vehicle, fund manager and degree of risk involved. Carefully read the prospectus to know what you’re investing in. Ask several different people for advice – beginning with your accountant and attorney.
Choose wisely. Select an investment manager as you would an attorney or accountant. Experience and skill are more important than personality and charisma. Investment frauds are often perpetrated by outstanding salesmen with impressive personal résumés but no ethics. Stick with Registered Investment Advisors (RIA), Chartered Financial Analysts (CFA) or Certified Financial Planners (CFP). Ask about complaints lodged against their firm or its personnel.
Ask questions. Don’t be afraid to ask “What exactly am I investing in?” “Where is my money held?” and “Who is your auditor?” And don’t accept “trust me” as an answer. Honest investment firms willingly provide information; dishonest ones are secretive. Honest firms generally use well-established and reputable auditing firms and will use a custodial firm to hold your funds rather than keeping them themselves. Ask to see audited financial statements.
Demand detailed reports. Honest investment firms provide detailed, professionally prepared reports on a regular basis—monthly, quarterly, annually, or all three. If there’s a custodial firm, you should receive a report from the custodian as well. Reports should include detail about whether you’ve made or lost money and should list the assets you invested in. Ponzi schemes and other scams succeed because victims trust the principals enough to ignore a lack of documentation.
Be patient. The promise of significant wealth via one successful investment is appealing, but investing should be an intellectual exercise, not an emotional one. Be skeptical. Think more about what can go wrong than what can go right. Before making any significant investment, consult your accountant or attorney.
James I. Marasco, CPA/CFF, CFE,
Jim is a partner at EFP Rotenberg. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFP Rotenberg affiliate company). Read more about Jim.