Your Money

Avoid Fraud: Research Investment Tips Thoroughly

Posted: 4/29/2011

(NAPSI) - While there’s nothing wrong with getting investment ideas from friends and acquaintances, wise investors don’t just rely on casual tips. Before handing over any money, thoroughly research the investment and the person selling it.

It was a lesson Carolyn and Ray Thompson learned the hard way. Friends had told them about a new and exciting green energy opportunity involving windmills.

They were told the windmills would be small enough to install on rooftops, Ray Thompson, 71, said. Shareholders could purchase exclusive territories and lease windmills to homeowners and businesses.

The Thompsons invested $30,000 and were to receive shares in the windmill company, three territories in which they could launch their windmill business and three free windmills of their own. But after traveling to Las Vegas for the initial shareholders meeting, the Thompsons realized they’d been scammed—there were no innovative new windmills. The Thompsons and about 200 other investors were shown a full-size windmill, still being set up in the middle of the desert.

“When I saw that windmill,” said Carolyn Thompson, 65, “I couldn’t stop the tears from rolling down my cheeks. It was nothing like what they were telling us.”

Con men regularly rely on word of mouth to bring in new victims. They also make their pitches to groups, knowing that subtle social pressure brings in more money. Psychologists call it “social consensus” and it is the foundation of what’s known as affinity fraud, said John Gannon, president of the FINRA Investor Education Foundation. “The thinking goes that if everyone is doing it, it must be okay. The problem is no one looks behind the curtain to question the man working the levers.”

In the Thompsons’ case, that man had a long history of alleged scams and was eventually indicted by a federal grand jury.

Investors should always check with the U.S. Securities and Exchange Commission (SEC) or state securities regulators to make sure an investment is registered, advises Gannon. There’s no guarantee a registered security will be a safe investment, but the chances for fraud increase substantially with unregistered securities that offer little or no public financial information.

Investors should also ask if the person selling the investment is registered with FINRA, the SEC or the state’s securities regulator. Unregistered sellers are not qualified to sell you anything. If they say they’re registered, verify that with the authorities. The FINRA Foundation’s fraud-fighting website at www.SaveAndInvest.org provides the information, links and phone numbers you’ll need to reach the appropriate agencies.

“What we really feel bad about,” said Ray Thompson, “is that we talked to other people and got them into it, too. They lost $10,000 each. My losses are my fault, but when I bring other people into it, I’m really sorry about that.”

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