How to Avoid Fraud

A basic understanding of how scam artists work can help you avoid fraud and protect your money. Learning how to invest wisely can help you reach your financial goals. Here are some ways to help avoid being scammed:

• Be aware before you share your contact information in response to an investment promotion.
• Learn what you can do to avoid investment fraud, including red flags to watch for and where to go for help.
• Learn how to protect yourself online, and how to protect your social media accounts.
• Learn about the different types of investment fraud, including those found online and in social media.

The SEC’s Office of Investor Education and Advocacy and Retail Strategy Task Force created a series of three videos with tips to help Main Street investors be their own first line of defence against fraud.

The Internet has made our lives easier in many ways, but you need to know how to protect your privacy and avoid fraud. Fraudsters don’t only target people investing online — they also use information they find online to send bogus materials, solicit, or phish.

Phishing is the attempt to obtain financial or confidential information from Internet users. It usually begins with an email that looks as if it is from a legitimate source, often a financial institution, with a link to a fake website that looks like the real one. Once you enter your account and password details, the fraudsters have access to your account.

Protect yourself when using social media

• Privacy settings. Default settings on many sites are broad and may share information with a vast online community. Check and tighten them before posting anything.
• Biographical information. Limit how much of the profile information a site requires is visible to other users.
• Account information. Never share account numbers, Social Security numbers, bank details or other sensitive financial information on social media. To speak with a financial professional, use a firm-sponsored channel — phone, letter, firm email or the firm’s website.
• Friends and contacts. Think about why you use the site. You are under no obligation to accept a “friend” request from a financial service provider, or from anyone you don’t know well.
• Site features. Understand who will see your messages — only the recipients you choose, or every user — before you post.

Online security tips

• Pick a strong password, keep it secure, and change it regularly.
• Use different passwords for different accounts.
• Avoid logging in on public or shared computers. If you must, log out completely when you are done.
• Be careful on public Wi-Fi, such as in cafés and airports — it is easy to eavesdrop on traffic, including passwords.
• Think before clicking links sent to you, even by a friend.
• Password-protect mobile devices linked to your social media accounts in case they are lost or stolen.

Protect your investments by watching out for these red flags:

• Unlicensed investment professionals
• Aggressive sellers who may provide exaggerated or false credentials
• Offers that sound “too good to be true”
• “Risk-free” investment opportunities
• Promises of great wealth and guaranteed returns
• “Everyone is buying it” pitches
• Pressure to invest right now
• Over-the-top, sensational pitches that may have fake testimonials
• Unsolicited pitches seeking to obtain your personal information
• Requests to pay by credit card, gift card, or by wiring money abroad or to a personal account

Ask questions. Fraudsters are counting on you not to investigate before you invest. It’s not enough to ask them for more information or references — they have no incentive to set you straight. Do your own independent research.

Research before you invest. Unsolicited emails, message board posts and company press releases should never be the sole basis for an investment decision. Understand the company’s business and products, and look for its financial statements on the SEC’s EDGAR system.

Know the salesperson. Check out whoever is touting the investment — even if you know them socially. Find out whether they are licensed to sell securities in your state and whether they or their firm have had run-ins with regulators or investors. The SEC’s and FINRA’s free databases show brokers’ and advisers’ disciplinary history; your state securities regulator may have more.

Be wary of unsolicited offers. Take extra care with an unsolicited pitch, or a company praised online, when you can’t find current financial information from independent sources — it could be a pump-and-dump. Be wary of foreign or “off-shore” investments too: if something goes wrong, it is much harder to trace money sent abroad.

Protect yourself online. Online and social platforms offer a wealth of opportunity for fraudsters — see Protect Your Social Media Accounts.

Know what to look for. Learn the different types of fraud and the red flags that may signal one.

Red flags and common persuasion tactics

How do successful, financially savvy people fall for investment fraud? Researchers have found that fraudsters use persuasion techniques tailored to each victim’s psychology. Watch for these:

• If it sounds too good to be true, it is. Watch for “phantom riches” and compare promised yields with returns on well-known stock indexes. Claims of “incredible gains,” a “breakout stock pick” or “huge upside and almost no risk” are hallmarks of extreme risk or outright fraud.
• “Guaranteed returns” aren’t. Every investment carries risk, reflected in its expected return. If your money is perfectly safe, the return is likely low; high returns mean high risk, possibly a total loss. Fraudsters work hard to paint a picture of your life once you’re rich. Don’t believe it.
• Beware the “halo” effect. A likeable or trustworthy manner can blind you. Credibility can be faked — check actual qualifications.
• “Everyone is buying it.” If a pitch focuses on how many others have bought in rather than on whether the product suits you, treat it as a red flag.
• Pressure to send money right now. “Once-in-a-lifetime” offers that vanish tomorrow are designed to stop you investigating. Take the time you need.
• Reciprocity. Free seminars and lunches are offered in the hope that a small favour earns a big one. Take the material home, research the investment and the seller, and make sure you understand the product and all its fees.