Avoiding Investment Scams | Marcum LLP

We are currently living through difficult financial times: inflation and interest rates are high, stock markets have fallen dramatically, and the supply chain appears to be disrupted. Even the most respected businessman can find himself in financial trouble when his fortunes turn against him. In such a case, they may try to make an investment that will turn their luck around. Aren’t we all?

By nature, investors are willing to take some risk – or they won’t invest. When making an investment, however, you should take the necessary steps to ensure that the person handling your funds is making a legitimate investment on your behalf.

History is littered with investment scams. Many make the news, but many others do not. Understanding past investment scams can help current investors avoid them in the future. Some of these cases are truly incredible, such as those of Ponzi schemers like Bernard Madoff1 and pump-and-dump con artists like Jordan Belfort2. Early in the pandemic, some scammers even exploited the need for PPE (personal protective equipment) and busy individuals, hospital systems and even governments.3

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

Consider the three elements of renowned criminologist Donald Cressey’s fraud triangle: pressure, opportunityand rationalization. For a con artist, bad economic times provide pressure and the need to make money provides rationalization. Your investment provides scammers with a potential opportunity.

So what can be done to protect you, the potential investor, before you make an investment?

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

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

2. Take your time.

Many scams depend on a sense of urgency. If you get an unsolicited call or email and are pressured to commit before you have time to make an informed decision, that’s a red flag.

3. Ask for information.

Before investing, carefully review the investor 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 they have the equipment to succeed? If this is a new area of ​​investing, who helps provide expertise? What other investors are already on board?

4. Think critically about the business model.

Does it make sense? If they are claiming a hot new product or an emerging market, what hard evidence is there of its success? Don’t be fooled by fancy-looking websites or technophiles – a nice website is easy to make and is not proof of a stable business.

5. Use your resources.

Check your Secretary of State’s website and search for the business. 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 such thing as a 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