Securities Regulator Provides Helpful Guidance To Avoid Fraud

James J. Eccleston, esq.

he National Association of Securities Dealers (NASD) has published, Fraud Fighting 101: Smart Tips for Older Investors. It's worthwhile reading for all investors — young and old — who have money to invest because, as the NASD puts it, "fraudsters tend to go 'where the money is'." Baby Boomers nearing or already in retirement ought to pay close attention as their sizable nest eggs attract fraudsters. Let's highlight the NASD's advice regarding how fraudsters operate and how to report suspicious activities and investment scams.

Fighting Fraud 101 first alerts readers that stereotyping the typical fraud victim as "isolated, frail and gullible" simply is wrong. The NASD reports that recent research confirms that fraud victims fit within a very different (and much larger) profile. First, they are self-reliant when it comes to making decisions. Second, they are optimistic. Third, they have above-average financial knowledge. Fourth, they earn an above-average income. Fifth, they are college educated. Sixth, they have experienced a recent health or financial setback. Seventh, they are open to listening to new ideas or sales pitches. According to the NASD, these types of people are "an investment fraudster's prime target."

Next, the NASD discusses scam psychology. This is a valuable discussion because it goes beyond merely suggesting that investors avoid investments that sound "too good to be true." The NASD frames the issue well when it states that "the trick is figuring out when 'good' becomes 'too good.' To do so, Fighting Fraud 101 alerts readers to the fact that fraudsters are "masters of persuasion" who will tailor their pitches to match the psychological profiles of their victims. After asking what appear to be benign questions — regarding politics, health, family, hobbies and so forth — fraudsters then "bombard [investors] with a flurry of influence tactics." According to the NASD, the more common tactics include:

The "Phantom Riches" Tactic. Here, the fraudster entices the investor with remarks like, "These gas wells are guaranteed to produce $6,800 a month in income."

The "Source Credibility" Tactic. Fraudsters build credibility by claiming to work for a reputable firm, claiming to hold a special credential or claiming to have unique experience.

The 'Social Consensus" Tactic. Here, the fraudster leads the investor to believe that other savvy investors already have invested.

The "Reciprocity" Tactic. Fraudsters offer to do a small favor for the investor in return for investing, for example, by reducing the commission on immediate purchases.

The "Scarcity" Tactic. Here, the fraudster "creates a false sense of urgency by claiming limited supply."

Knowing the psychological tricks that fraudsters employ, the NASD recommends that investors use "reverse psychology" to counter them. Fighting Fraud 101 outlines three key strategies. First, terminate the conversation. Investors can do so either by hanging up, or by telling the person that they have to consult with someone first. As the NASD puts it, "Knowing your exit strategy in advance makes it easier to leave the conversation, even if the pressure starts rising."

Second, ask questions. The NASD cautions that legitimate investment salespersons must be properly licensed, and their firms must be registered either with the NASD, with the Securities and Exchange Commission (SEC), or with a state securities regulator. Likewise, companies (with very few exceptions) must register their securities with the SEC or with a state securities regulator before they can sell shares to the public. Given all of that, Fighting Fraud 101 recommends that investors "turn the tables" by asking the seller whether he or she and his or her firm are registered with the regulators and, if so, which ones. Likewise, regarding the investment, investors should ask whether the investment is registered and, if so, where. Of course, investors then should verify the accuracy of the answers to those questions with the regulators, and Fighting Fraud 101 provides the contact information for investors to do so.

Third, the NASD advises that investors consult with someone before investing. This is true especially when fraudsters warn investors, as they often do, not to disclose the deal to someone else because it is secret and reserved for a chosen few!

Finally, in Fighting Fraud 101 the NASD provides the contact information for investors to have their names taken off Solicitation Lists in order to reduce the number of sales pitches. The NASD also provides the contact information for investors to report frauds.

Given the true (and almost overarching) profile of the fraud victim, all investors should heed the warnings that the NASD has issued!

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.