The Bernard Madoff scandal shows how easy it is to get swindled by a con man. If anyone looked legitimate it was Madoff, who was the former chairman of NASDAQ. But his investment business was a massive scam involving as much as $21 billion with victims including Hollywood celebrities and hall of fame athletes. While it may not always be possible to spot an investment scam, there are certain well know warning signs to look for. Motley Fool has this informative article on six signs that an investmet is a scam. Number one on the list is:
1. The promise of "low risk and high gain." Click your heels three times and repeat to yourself: "There is no such thing as a free lunch." It’s a fundamental fact of investing that the higher the potential return, the higher the risk that you may never see that return.
Here is an article on investment fraud including descriptions of the most prevalent forms of fraud along with information on how to report investment fraud to the authorities. An example of an investment fraud scam was the scam a few years ago in the Mississippi Delta involving life insurance agent Victor Nance:
On February 20, 2004, in Jackson, MS, Victor G. Nance was sentenced to 10 years in prison, fined $10,000, and ordered to pay over $9.1 million in restitution for his part in a large scale Ponzi scheme. Nance pled guilty to depositing $519,015 into AmSouth Bank, knowing that the funds were derived from mail fraud or wire fraud. He also pled guilty, along with co-defendant Hamric, to the forfeiture count designed to recover the $10.2 million that investors lost in the fraud scheme engineered by Hamric and Nance. Nance had been a financial advisor for years and convinced many of his clients that they should invest in a “Promissory Note” with Louis Hamric which would pay them between 18% and 30% per year. Nance convinced over 40 clients to invest over $10 million in this scheme. In return Hamric paid Nance approximately $4.8 million in commissions for his services. Although the victims were told that they were investing in a money trading program, no such programs exist and the interest they received was, in fact, a repayment from their own funds.
Finally, here is an article on how to protect yourself from an investment scam. Victims of scams can sometimes recover part or all of their loss, but it typically involves complex litigation against multiple parties. The best way to protect yourself is to not get scammed in the first place.