Beware of phony investment risks

Part II

Last week we listed “investment opportunity” frauds ranging from phony oil fields to precious gems. How can you protect yourself? Before investing, ask tough questions of yourself and those who solicit you. If the answers are vague or complicated, decline.

Be cautious if the company selling stock, assets, or partnership units has not registered its securities. Legitimate companies file prospectuses and annual reports with regulators. If a promoter says it is “structured” to exempt its securities from registration, you are probably dealing with an outfit that is purposely avoiding regulators.

Scam artists create the impression that only a few opportunities are left. They try to convince you that you’ll miss out if you don’t send thousands of dollars by overnight courier or wire transfer. If you respond, kiss your money goodbye.

Claiming their “opportunity” is similar to other “hot” deals, scam artists use media accounts of legitimate company successes as bait. Success stories of other companies are irrelevant for your purposes. Get the track record of the company you’re dealing with and the background of the promoters.

Legitimate companies are always accountable. Ask for written proof of how much money goes to the actual purchase or development of the opportunity and how much to commissions, profits and marketing.

If most of your investment covers expenses, much less will be available to earn a return. If you are investing in a telemarketing investment, how much is the broker paid to talk to you?

Get an independent appraisal of the venture you’re considering. An appraisal offered by the party soliciting the investment can be a fake. Talk to other investors. Get a value history of the investment. Discuss all investments with a trusted accountant or adviser.

Seek published information about the company. Get proof that its securities are registered with the government. Consult with someone you trust who knows the company. Confirm that the promoter or salesperson is licensed to sell securities in Maine.

Contacting law enforcement agencies in the promoters’ home city is prudent but not foolproof. It may be too soon for victims to realize they’ve been defrauded and to have lodged complaints. Fraudulent promoters lie about their name or business history and even pay people to be “references.”

Don’t be fooled by appearances. Anyone can incorporate a business. Personal computers and desktop publishing can produce slick promotional materials. Toll-free telephone numbers can be located in private homes.

Sales representatives should advise you of risk. Be particularly suspicious of pitches that play down risk or portray risk disclosures as formalities required by government.

Believe risk disclosures that say you could lose your whole investment. When your money is gone bogus promoters often use “risk disclosures” against you.

Scam artists’ successes depend on having an airtight answer for everything. They inflate the value of worthless investments and they promise profits years later so you won’t discover the scam until they are long gone with your money.

Investing is risky business. Anyone who claims an investment is likely to turn a profit quickly should have a basis for the claim. Demand written projections from independent sources. Be especially wary when someone tells you profits will be big enough to offset the risk of investing. Even potentially high-profit investment is high risk.

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