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Avoiding Investment Fraud and Deceit

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        It's darn near impossible to open a newspaper today without at
least one headline referencing financial fraud and abuse.  Frankly, the
sad existence of financial criminals, whose incomprehensible greed and
deceit should be labeled financial terrorism makes me sick to my stomach.
 As the financial world shakes out its demons amidst a global meltdown,
more and more financial shenanigans are likely to come to light. The
Bernard Madoff scheme has revealed that no investor is exempt, whether
you are rich or super rich, whether you are a charity or even if you are
in the "not-so-rich" column-everyone is fair game for these perpetrators.
  Who is going to protect you?  It's quite clear that federal
regulators like the SEC have been asleep at the switch. Â So who is an
investor to trust? Â How can you assure yourself that you are not a
sitting duck?The PerpetratorsThere is no shortage of fresh financial
scandals in the pages of the Wall Street Journal lately. Â Perhaps the
most visible has been the ponzi plot of Bernard Madoff and his wealthy
"feeder" friends. Â While the true cost of this elaborate heist may take
years to uncover, the estimate of the impact hovers at over $60 billion.
 Then we have Allen Stanford, the Texas Financier who may have swindled
about 50,000 investors out of US $8 billion, give or take, using high,
fixed rate CD's. Â The overwhelming majority of Stanford's funds
disappeared into a "black box" controlled by Stanford and his CFO, James
Davis. Â With a "black box model" the manager is essentially saying
"trust us, we know what we are doing". And in the latest allegation of
financial fraud, as reported by the Wall Street Journal, hedge fund
manager Paul Greenwood and Stephen Walsh stand accused of
misappropriating over $550 million of investors' cash and using it to
fund their lavish lifestyles and rich man's hobbies. Â Red FlagsOn Wall
Street, there's no such thing as easy money or risk-less investments. If
something sounds too good to be true, it probably is. Â As the CFA
Institute reveals, one of the red flags in the Madoff affair is that
reported performance was too consistently good. Â Other popular, Internet
based investment scams purport to use ultra-safe "prime bank" financial
instruments from the world's largest banks. Rewards without clear risk
simply do not exist. Â Here are some other clues that should have sent
investors running the other direction:•The advisor who gave the
investment advice and executed trades also held custody of the account
(more will follow in the next paragraph on why this is
important).•Madoff's website described a sophisticated system for
trading securities, but did not describe a process for managing client
assets•Paying fines without admitting guilt are an unusual
characteristic of the financial services industry (Madoff)•Multiple
complaints by regulatory agencies have been filed•Account information
is not transparent or difficult to obtain (ie. No online
access)•Statements appear doctored or printed in-house without the
ability to audit account positions from an independent partySafety TipsAs
a financial advisor, please heed my suggestion-never do business with a
financial professional who does not separate the brokerage custody
function from the advice function. More importantly, if you do not know
what the advisor is buying on your behalf, find out. This lack of
transparency, or "black box model" of investing is one my biggest
reservations about investing in hedge funds. I suspect that many
investors are going to start asking many more questions of their managers
and might be much less tolerant of black box managers in the future.The
first tip in safeguarding your assets is to do your due diligence by
visiting the websites of the regulatory agencies that govern the
advisor's business. Â Investors should get in the habit of visiting both
the FINRA and SEC websites to review the firm's and the advisor's
compliance history.Next, understand the investment strategy. Â If you
don't know what you are buying, then don't buy it. Â The nature of the
risks involved can vary widely and should be well understood. Â Buying
investments for the sake of their perceived complexity may sound sexy or
alluring, but may not be a wise use of your dollars.If it sounds too good
to be true, it probably is. One of the red flags in the Madoff affair is
that reported performance was too consistently good. Â Perfect positive
returns simply do not exist. Â Returns will vary year to year, some by
drastic variations.  Also, be sure to match investment strategy to
reported performance. Â Â In the case of Stanford, CD rates being offered
were paying obscenely high rates. Â Risk and reward are directly related.
 By definition, CD's are on the low risk to (almost) no-risk side of the
spectrum. Â Something just did not jive there.Be wary of "sure things".
 Legitimate investment professionals do not promise sure bets. Financial
scams often begin with the allure of inviting only a "select group of
people" to participate in such "crafty investment opportunities". Do your
homework about what, if any, regulatory oversight exists with regard to
the investment products being suggested to you.  For example, mutual
funds, stocks and exchange traded funds are heavily regulated, while
hedge funds and certain offshore investments are significantly less
regulated.Finally, you should consider limiting your exposure to any one
investment. Â No more than ten percent of your assets should be invested
in a single fund. Â Despite recent market volatility and the increased
short term correlation of global assets, diversification is one of the
most fundamental and enduring investment principles.        <!--
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