I have seen a lot of scams.  The most devistating scams that I have seen are investment scams.  Most of these scams are Ponzi scheme.  Ponzi schemes are investment schemes that claim that new investments are invested into the business venture when in fact they are used to line the scammers pocket and pay out nonexistent returns to existing investors.  The scheme is named after Charles Ponzi, who ran such a large scheme in the 1920s.

 These scams are pitched to high-income and low-income folks alike.  They can be pitched in person, in an advertisement, on a web site, in an email, or by telephone. 

 So, how to tell whether or not an investment opportunity is a scam or not?  Here are some signs:

• The opportunity guarantees a certain rate of return and no risk.  In most cases, state and federal securities regulations prohibit such a guarantee.  All investments come with risk.
• Marketing materials show that the investment opportunity has consistently high returns.  Even Warren Buffett’s Berkshire Hathaway has had a few bad years.  Most investments did have a bad year within the last three years.
• You are encouraged to borrow money to invest.  Do not invest money that you don’t have.  You should only invest whatever you can afford to lose, just in case that happens.
• You don’t understand how the business venture makes money.  Maybe, because it doesn’t.   Even if it is a legitimate business venture, don’t invest in it if you don’t understand it.
• You must act now.  If you must act now, do so by saying “no.”
• No literature is available.  Legitimate investment opportunities come with prospectuses or risk disclosures.  These documents explain how your money will be invested in and what the risks are.  These documents are required by law for most investment opportunities.
• There is nothing to sign.  Without anything in writing, it’s your word against the person who you may never see again.

 All investment decisions should be based on thorough research.  Your research should include the following:

• Check to see if the investment opportunity is registered with the SEC or state securities office.  Most investment opportunities offered as securities must be registered with the SEC and/or state securities office.  There are registration exemptions.  Check with your state securities office to verify that the investment opportunity is registered.  If not, ask if it should be.
• Check to see if the person and/or firm offering you the opportunity has the appropriate licenses.  Though they may not need a license, it doesn’t hurt to call the state securities office and ask.  If they are unlicensed but should be, the securities office might act to stop him.  Don’t feel bad if that happens—you may prevent others from becoming victims.
• Check the investment opportunity, the person, and firm by using web search engines.  Although you shouldn’t believe everything you read on the internet, the results might suggest
• Ask for audited financial statements.  If the business or fund has been in existence, audited financial statements should be available.  These statements include the balance sheet, income statement, and cash flow statement and should be audited by a public accounting firm.  If you do not understand financial statements, find an accountant that does.  The accountant can help you understand each financial statement, maybe spot red flags, but would not be able to give their stamp of approval.  The audit report should state that the financial statements “present fairly, in all material respects, the financial position” of the investment fund or business.
• Check out the accounting firm that audited the financial statements.  Contact the state board of accountancy and ask about the accounting firm.  How long have they been in business?  If possible, visit the firm’s office.  How many employees do they have?  Is there anybody there?
• Seek advice from independent professionals.  Let a securities attorney, a financial advisor with no financial incentive in the investment opportunity, and a certified public accountant with audit experience review the opportunity.

 There is no fail safe way to determine whether or not an opportunity is legitimate or fraudulent.  Fraudsters will go through extremes to make their scam seem legitimate.  Watch for the signs and anything else that seems odd to you.  Do as much research as you can.

 Finally, do not invest more than you can afford to lose.  Diversify your investments.  In other words, do not put all your eggs in one basket.  Do not let greed cloud your judgement.