First-time investors can ferret out frauds> Look for vague replies to simple questions

Fraud is always a possibility, even with secured, regulated investments. Before investing, ask tough questions, both of yourself and those who are soliciting your investments. If the answer to any of the following questions is no, or if an answer is vague or complicated, more than likely the investment being pitched is a fraud.

Is the company I’m investing in registered to sell securities?

Be cautious if the company selling you stock, assets or partnership units has not registered its securities. Companies that register their securities file prospectuses and annual reports with securities. If a promoter tells you that your investment is “structured” to exempt the securities of the company from registration, you may be dealing with an outfit that is purposely avoiding contact with regulators.

Is it “too late” if I don’t invest my money now?

Using sales scripts, scam artists create the impression that only a few shares of stock or partnership units are left. They try to convince you that you’ll miss a big opportunity if you don’t send them thousands of dollars by overnight courier or wire transfer. Once you give your money to a scam artist, it may be too late to get it back.

Does the investment have a track record?

Claiming that their “opportunity” is similar to those of “hot” entrepreneurs, scam artists often use news stories about the success of legitimate companies as bait. Unfortunately, success stories of other companies in the field are irrelevant for your purposes. Get the track record of the company you are considering investing in and the background of the people promoting it.

Legitimate companies account for investors’ money at all times. Ask for written proof of how much of your money is going to the actual purchase or development of the opportunity, and how much is going to commissions, promoters’ profits and marketing costs. If most of your financial investment is slated to cover expenses and costs, much less will be available to earn a return. Telemarketing is particularly expensive; if you are investing in a telemarketed investment, how much are your brokers getting paid to talk to you?

Do I know who I am dealing with?

Can you find published information about the company in which you are investing, proof that the company has registered the securities it is selling with a government agency (if required), or someone you trust who has heard of the company? Have you checked with our state, if required? If not, be cautious. You’re giving your money to strangers.

Checking law enforcement agencies in the community where promoters are located is prudent, but not foolproof. It may be too soon for the company’s victims to realize they have been defrauded or to have lodged complaints with the authorities. In addition, fraudulent promoters can lie about their names or their business histories, or even pay people to provide “references.”

Can I tell a genuine company from a fictional one?

Don’t let appearance fool you. For a few dollars, anyone can incorporate a business entity. Personal computers and desktop publishing software help scam artists produce slick promotional materials. Phone-service providers can put toll-free telephone numbers in homes.

Did my sales representative tell me the risk of losing my money was high?

Sales representatives should tell you the risk of particular investments. Be particularly suspicious of sales pitches that play down risk or portray written risk disclosures as routine formalities required by the government. Believe the risk disclosures that say you could lose your whole investment. When your money is gone, fraudulent investment promoters often use “risk disclosures” against you.

Consumer Forum is a collaborative effort of the Bangor Daily News and Northeast COMBAT. Send your questions to Consumer Forum, Bangor Daily News, P.O. Box 1329, Bangor 04402-1329. COMBAT is a nonprofit organization with annual dues of $10. For membership information write to the above address.