6 Telltale Signs of a Bad Investment

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  • Salesperson seems to openly live a lavish lifestyle: The most famous Ponzi schemers have been infamous for their extravagant lifestyles. Scott Rothstein, the mastermind in a $1.2million Ponzi scheme said, “We were living like rock stars; private jets, massive amounts of money. There were lots of things that kept fueling that,” in his 2011 deposition testimony (reported in Forbes 2014). Be cautious if you are approached by a broker or advisor who fits the bill. As an extra precautionary measure, check your broker out on FINRA’s BrokerCheck.
  • Their marketing/ sales documents look like they could have come out of a printer in their home! Robert Van Zandt, known as the Bernie Madoff of Bronx, who was criminally prosecuted for running a Ponzi scheme, distributed homespun brochures that said “Learn to Earn 9% On Your Investment.” The quality of their marketing materials could be a good indication of the credibility of the investment.
  • “Guarantees” with high returns: If it sounds too good to be true, it probably is. Look out for buzzwords like “High Return” or “Risk-Free” Investments. But in reality no investment is risk-free. In fact, higher probability of return is usually associated with higher risks, according to the risk-reward tradeoff principle. So if you are offered a guaranteed high return investment with no risks, the chances are that you are dealing with a financial scam.
  • The investment does not trade on an exchange and is not registered or affiliated with any reputable investment house, law firm or accounting firm. Ponzi schemes typically involve investment products that are not registered with the SEC or state regulators because registered products and services have more information available to investors about their finances, which are audited periodically.
  • Similarly Ponzi schemes also involve investment professionals and firms that are not licensed or registered with FINRA.
  • Seems like they are always looking for new investors: Financial schemes rely on attracting new money to pay off early stage investors to maintain the appearance of legitimacy and strong returns. These schemes collapse when it becomes impossible to recruit new investors or a large number of investors get shaky and want to cash out at the same time.

Jenice L. Malecki, Esq. was interviewed by CNBC today for a segment on white collar crimes. Stay tuned for more tips in that segment!