In a world of increasing complexity, many people are searching for a way to know who they can trust. This is especially true when it comes to investing money.

Unfamiliar with how our financial markets work, often people don’t know how to thoroughly research an investment and its salesperson. Many fall prey to affinity fraud in which a con artist claims to be a member of the same ethnic, religious, career or community-based group.

“You can trust me,” says the con artist, “because I’m like you. We share the same background and interests. And I can help you make money.”

Another equally effective pitch, if the con artist is not a member of your union or association, is to lull members into a misplaced trust by selling first to a few prominent members, then pitching the scam to the rest by using the names of those previously sold.

The effect is the same: Once the connection to the group is understood, the natural skepticism of the individual member is overcome, and one more group name is added to the sales column.

Once a victim realizes that he or she has been scammed, too often the response is not to notify the authorities but instead to try to solve problems within the group. Swindlers who prey on unions or associations play the loyalty angle for all its worth.

How to avoid affinity fraud

• Beware of the use of names or testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once you’ve invested. (As with a Ponzi scheme, for example.)
• Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.
• Ask for professional advice from a neutral outside expert not in your group—an accountant, attorney or financial planner—to evaluate the investment.
• Before investing any money, call your check with the Nova Scotia Securities Commission to learn more about the salesperson and firm. The simplest inquiry is to ask if they are registered to do business in Nova Scotia, and if the investment isallowed to be sold. If one or the other is not registered, that is a sure warning to inquire further.
• Don’t take the word of a salesperson! Check out the investment yourself.

A team of scam artists set up a makeshift office, called a “boiler room” and work in stages. The scam artists first identify potential victims. They might use a phony survey to find out about your investment experience, offer you free research, or try to get information like your mailing address, phone number and e-mail address.

Next, someone else on the team will call you back with the sales pitch, often calling multiple times. The caller may boast of a business idea that sounds probable, usually in a sector that’s in the news. Here’s the catch: the investment may not exist. By the time you realize you’ve been taken, the scam artist will have closed up shop and moved on to another scam. You’ll likely never see your money again.

These networks of scam artists are highly organized, with many operations selling their victim lists to other boiler rooms. Because of this, victims of boiler room scams are at high risk of being targeted again.

What to watch out for

The scam artist may customize their sales pitch if they know anything about your personal situation or investment history. However, here are some things they’ll frequently say.

1. 1. You’ve been specially selected
2. The scam artist will tell you that this exclusive offer is not available to the general public.
3. 2. You’re guaranteed to make a lot of money with minimal risk
4. The scam artist will tell you that this is a safe investment with a high return. But real investments come with risks. If anyone promises you a high return on a “sure thing,” it’s likely a scam.
5. 3. This offer won’t last long
6. The scam artist may say that if you invest now, you could make a fortune. You should never feel pressured into buying an investment on the spot. Anyone selling you an investment should take time to know you and your investment goals in order to make sure the investment is suitable for you.
7. 4. Send your money now
8. You’ll be encouraged to send a cheque right away or wire money offshore. The scam artist may even send you an official-looking invoice for your investment, together with a prepaid courier envelope for your cheque.

Victims may be scammed again

Victims of boiler room scams are at high risk of being targeted again. The scam artist will usually use one of two tactics:

1. 1. Company takeover
2. The scam artist will tell you that another company has made an offer to buy your shares. You stand to make a huge profit on your previous investment. The scam artist might say that you must forward a “refundable” deposit or buy more shares to take advantage of this offer. In either case, if you send more money, you’ll probably lose that, too.
3. 2. Recovering losses for a fee
4. The scam artist will call you and admit that some or all of your investment has been lost. They will say that they can help recover your lost money – for a fee. Unfortunately, if you pay the fee, you’ll likely lose that money as well.

What you can do to protect yourself

The best way to protect yourself is to hang up the phone. In addition:

1. 1. Don’t give out your personal information
2. 2. Research the investment
3. 3. Check registration and qualifications
4. 4. Report scams to the Nova Scotia Securities Commission or your local regulator.

1. Were you promised a high return on a low-risk investment?

One of the first rules of investing is that higher return equals higher risk. In other words, the more money you can potentially make on an investment, the higher the risk of losing some or all of your investment.

2. Did you have enough time to make a decision?

You should never feel pressured into buying an investment on the spot. If you hear things like “act fast,” “one-time opportunity” or “buy now before it’s too late,” the person you’re talking to likely has something to hide.

3. Were you given confidential or “inside” information?

A scam artist may claim to have information that nobody else knows about a company. You have no way of knowing if this “inside” information is true. And even if it is, trading on inside information is illegal in Canada.

4. Can you verify the investment with a credible source?

If you receive an unsolicited investment opportunity, get a second opinion from your registered financial adviser, lawyer or accountant.

5. Is the person who contacted you registered?

Anyone who tries to sell you an investment or give you investment advice must be registered unless they have an exemption. You can contact the Nova Scotia Securities Commission (or your local regulator) to check if someone is registered.

If you answered yes to any of these questions, you may be dealing with investment fraud. think it’s a scam, don’t be afraid to say no. Just hang up the phone, delete the e-mail or walk away.

Most successful scams are built on trust. Scam artists often start off by asking seemingly harmless questions about your health, family or hobbies. For example, they may discover that you worry about not having enough money to retire on. They then use this info to push you into making a choice that is not in your best interest.

Here are just a few common ways a scam artist may try to get you to part with your money.

Through a group you belong to

Affinity fraud is a type of scam that targets groups such as religious groups, seniors’ groups, ethnic communities or social clubs. The scam artist may be a member of the group or may know someone in the group. These scams are often successful because many people are less likely to question advice that comes from someone they know.

A common type of affinity fraud is the pyramid (or Ponzi) scheme. Typically, investors are recruited through promises of high returns. Early investors often receive returns fairly quickly from “interest cheques.” They may be so pleased with their returns that they re-invest, or recruit friends and family as new investors.

Here’s the catch: the investment doesn’t exist. The “interest cheques” are paid from investors’ own money and the contributions of new investors. The scheme eventually collapses when it runs out of new investors.

Unsolicited e-mail or phone call

Many scams begin with spam e-mails that promote a certain stock. These e-mails typically promote risky investments for which there’s little information available. You may also get an unsolicited phone call about an investment opportunity. The caller may ask you questions about yourself and use the answers to manipulate you into a quick sale. They’ll also use high-pressure tactics, like repeat calls or limited-time offers.

The business may sound real. The caller might give you an address in the financial district, or direct you to a toll-free number or a website that looks legitimate for more information. However, the information on their website may be fake, and the address they give you may be nothing more than a post office box.

Be skeptical of any stock tips you get from unsolicited e-mail or phone calls. It’s a good idea to assume the tip is a scam until you’ve done your own research on the investment. You should never accept investment advice from someone you don’t know, who doesn’t know you or your financial goals.

Investment seminars

Investment seminars have become a popular way of promoting investments. The investments themselves may not be scams, but the sales tactics used at these seminars often raise concerns.

Some presenters are paid to promote specific investments that offer high returns. They may not tell you that these products are risky and may not be appropriate for you. The presenters are usually very good at public speaking and generating excitement about the investment. They’ll use high-pressure sales tactics to get you to invest on the spot or to schedule a follow-up appointment.

What can you do?

As already mentioned, a professional scam artist goes where the money is. So, while these are some of the more common tactics used to run a scam, they are not the only methods. Always be on your guard. Investigate before you invest. Do your research, check with another trusted adviser, check a new adviser’s registration. And remember, if it sounds too good to be true – it probably is.

Tonight and tomorrow morning I will be exhibiting and presenting at the Divorce Fair – hosted by the Legal Information Society of Nova Scotia. I’ve gotten a wide variety of reactions to this. Surprise, amusement, even disgust (mostly from those who refuse to accept the fact that approximately 40% of Canadian couples will divorce).

Divorce is a stressful and painful time. It is a highly emotional process. You may be heartbroken. You may be angry. Your finances are likely the list thing you’ll want to think about – but they may be among the most important issues to focus on. It is extremely important to plan for your divorce. This is the message behind the Divorce Fair.

When most people talk about divorce, aside from custody issues, money is usually top of mind. Who got what, how much, and why? The division of money and assets is a major sticking point in many divorce proceedings. How do you prepare yourself for this? There are a few simple tips:

1. 1. Know what you own (and owe). Make a list of your bank accounts, investment accounts, property and other assets you and your spouse own.
2. 2. Gather the paperwork. Make copies of your financial papers: account statements, tax assessments, mortgage contracts, insurance policies, etc.
3. 3. Be prepared for the costs of the divorce itself. If you are considering a divorce, be prepared and stash money away now to cover lawyers fees, alternate living arrangements, and other costs that may come up.

The other and significantly less known financial risk associated with a divorce or separation is financial fraud. To understand the link, let me remind you of the stress and emotional upheaval that comes with the divorce process. You are struggling to adjust to new financial realities, and in many cases you are managing your finances on your own for the first time, and making decisions you’ve never had to make before.

Sadly, no one is more aware of this than a con artist.

Results from last year’s CSA Investor Index indicated that almost half (46%) of investment fraud attempts were made to people undergoing major lifestyle changes – which included job losses, the death of a loved one, and divorce or separation.

The key to avoiding fraud is to be aware of your vulnerability and know the warning signs. Before you invest, educate yourself on investing basics to make smarter, safer choices, and learn to recognize the red flags of fraud before you become a victim.

With fraud attempts so prevalent, how can you work to protect yourself? To start, you want to be familiar with the Red Flags of Fraud – five signs that an investment opportunity might be fraudulent or inappropriate.

To help investors become more familiar with the signs of fraud, and more comfortable in their investment decisions, my colleagues at the Alberta and BC securities commissions have combined forces to provide an online tool to help you learn how to protect your money.
The interactive tool entitled Investment Scams: How to Protect Your Money, focuses on some common methods that fraudsters use to approach potential victims – via friend and family or ‘affinity’, the Internet, seminars and advertisements. The online resource engages users with an opening quiz and testimonials to raise awareness of the ways fraudsters attract their victims. The testimonials are based on real cases depicting how people are drawn into scams.

The comprehensive tool provides information about how to recognize, research and prevent fraud. Offered as modules that can be easily accessed and shared, the resource provides investors with checklists and tips to help them evaluate and research investment opportunities for risks and potential fraud. As well, there are features within the resource to help investors directly email questions to a person offering them an investment and submit a complaint to the securities regulators.

To try it out for yourself, visit the site of either the Alberta or British Columbia Securities Commissions. Some of the information presented will be specific to those provinces. To see how the same might apply in Nova Scotia, contact me, or pose a question in the comments below.

Also available, from the Alberta Securities Commission, is a similar tool Who’s Taking Care of Your Money? This online course guides you through the process of choosing and working with a financial adviser. For both novices and experienced investors, it includes information on managing your relationship with your adviser, and how to file a complaint if needed.

The IOSC website uses as logos the shields of the United States Department of Justice and the Federal Trade Commission, without the permission of these agencies. IOSC falsely claims to be a securities regulator operating in the U.S. for the benefit of U.S. citizens. This is not true.

The Finansinspektionen, the financial services regulatory authority in Sweden, was told of the site by a member of the public who was contacted by someone claiming to represent IOSC.

It appears that the website may be part of a fraud scheme targeting investors who own shares that have tumbled in value. In this type of fraud, the fraudsters generally claim they can redeem or exchange the worthless shares at an attractive price in exchange for an up-front fee. As soon as the fees have been paid, the fraudsters disappear.

To appear to be legitimate, the IOSC site features a section on regulatory matters claiming to be U.S. legislation, but which are excerpts from Canadian policies and regulations changed to look like U.S. law. The section on exemptions also contains names that are identical or similar to Canadian companies that have no link whatsoever with IOSC.

The website is currently being investigated, to identify the persons behind IOSC and determine whether Canadians have been solicited by IOSC representatives.

Investors are reminded to be wary when a firm offers to buy their shares for more than they are actually worth, especially if asked to pay a fee up front. In several similar cases, investors lost their deposits and never received the money they were promised.

Anyone who has information about IOSC is urged to contact the Nova Scotia Securities Commission.

Madoff jailed 150 years for ‘massive’ fraud (Globe and Mail)

Madoff gets 150 years for fraud (CBC)

What is a Ponzi scheme, and how can you recognize and avoid it?

The Ponzi scheme was named for Charles Ponzi, a clerk in Boston who first devised such a scam in the early 20th century.

To best understand a Ponzi scheme, think of the chain letters that were all the rage in junior high school – when people still used snail mail. If you sent a letter to six friends, who sent a letter to another six friends and everyone also sent two postcards, then all participants were supposed to receive 36 post cards from exotic locations all over the world. How many of you sent the letter? (Don’t be shy, we’ve all done it.) Now how many of you actually received 36 postcards?

Ponzi schemes are run in a similar fashion. Typically, investors are recruited through promises of high returns. Early investors often receive returns fairly quickly from “interest cheques.” They may be so pleased with their returns that they re-invest, or recruit friends and family as new investors.

Here’s the catch: The investment doesn’t exist. The “interest cheques” are paid from investors’ own money and the contributions of new investors. The scheme eventually collapses when the number of new investors drops.

Just as with the chain letter, where you may have received a few postcards before things petered out, with a Ponzi scheme, you may receive some returns, perhaps even for years, before new investors run out and the money dries up. Then you discover you weren’t receiving “interest” after all, and your initial investment is gone.

Of course, all you ever invested in your chain letter (I hope) was your time and your hopes. And the cost of a few stamps. Sadly, many have lost much, much more to Madoff and other scammers.

Can you indentify the Red Flags in the Ponzi description? Learn more about how to spot a fraud.

Consider this scenario:

John recently retired, and in the past year has seen his retirement savings reduced significantly. He has been forced to rethink his retirement plans and may need to downsize into a smaller home to cut costs.

After reading an ad in the local newspaper, John contacted the “Custom Financing Centre,” a firm offering financial assistance to holders of RRSPs and other registered plans. He was told that he could withdraw money from his RRSP without paying tax. This looked like a very attractive offer!

A simple scheme was proposed to him:

• Use the amount accumulated in his RRSP to buy shares of an “RRSP eligible” company. Then, obtain a loan equivalent to 80% of the RRSP, which could be used as he saw fit.

Since this was an exceptional offer, it was only available for a limited time. John didn’t take much time to think it through, lest he miss his chance.

Remember, when it sounds too good to be true, it probably is. Don’t give in to pressure to invest.

John finally understood this, but it cost him dearly:

• The shares he purchased were worthless. He therefore lost his entire RRSP because the “RRSP eligible” company in which he invested did not exist.The shares were not RRSP eligible, despite what he had been told.
• He thus could not withdraw money from his RRSP without paying tax and he received notices of assessment from the provincial and federal governments. He was now obliged to pay tax on all the money withdrawn from his RRSP, plus interest and substantial penalties for infringing the rules.

RRSP schemes like this one were seen during the last economic downturn in the 1990’s and are starting to pop up again. Be careful.

The lessons to be learned:

Before you invest, ensure that the dealer and the dealer’s representative are registered with Nova Scotia Securities Commission;

• Make sure the company that issued the shares (or the securities) has filed a prospectus with the Nova Scotia Securities Commission;
• f the investment is being sold as an exempt security, make sure you understand the exemption, and that you qualify for it;
• Never take it for granted that the person you are dealing with is telling the truth.