Personal Finance

More than 8,000 investors were misled by this $1.2B Ponzi scheme. Here's how to spot a fraud

Key Points
  • The SEC this week ordered alleged conductors of a Ponzi scheme to pay $1 billion in penalties and repayments.
  • The move may help clear the way for 8,400 retail investors to recover the money they lost.
  • If you think you would never fall victim to such a crime, think again. These are the telltale signs regulators say you should watch out for.

If you've fallen victim to financial fraud, getting back the money you lost takes time — if it's ever recovered at all.

Take the latest developments with Woodbridge Group of Companies, a real estate investing firm that has been implicated, along with its former owner and related companies, for bilking 8,400 retail investors, many of whom were older Americans, through a $1.2 billion so-called Ponzi scheme. In a Ponzi scheme, money from one set of investors is used to pay off other, earlier investors, or is used for the perpetrators' personal gain.

The Securities and Exchange Commission on Monday said it has ordered Woodbridge and its former owner and CEO, Robert H. Shapiro, to pay $1 billion in penalties and repayments. The regulator first filed an emergency action against the company in December 2017.

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The agency's latest move clears the way for investors to potentially get back the money they lost. How much is distributed to victims will depend on Woodbridge's Chapter 11 bankruptcy and how much a related liquidation trust collects.

One of the most infamous Ponzi schemes is that of Bernard Madoff, who is serving a 150-year prison sentence in connection with a record $65 billion decades-long scam for which he was arrested in 2008.

You may think you can easily spot a fraudster. But chances are, you are vulnerable to getting duped.

"The frightening truth about fraud is scammers scam and liars lie," said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority, or FINRA, which regulates brokerage firms.

To lessen the chances of becoming a victim, there are precautions you should take.

Do a background check

Before you begin working with financial professionals, check their registration records to verify that they are, in fact, licensed, and have not had any egregious complaints lodged against them.

Options include BrokerCheck, which is provided by FINRA; the Investment Adviser Public Disclosure from the SEC; or your state securities administrator.

If the financial professional does not show up in a search, you should think twice about working with him or her, said Lori Schock, director of the SEC's Office of Investor Education and Advocacy.

"Most of the retail-facing fraud that we see is committed by those who are not registered," Schock said. "It is unlicensed people selling unregistered products."

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You should also look at records periodically to check up on a financial professional.

"If you have been working with the person for a while ... go ahead and take a peek and see what you see," FINRA's Walsh said.

Not all disclosures that show up on a professional's or firm's record are a red flag, said Walsh. But they should be a conversation starter.

Watch for high-pressure sales tactics

Be wary if you are pressured to act immediately or are promised success rates that are too good.

"If someone offers you a guaranteed high rate of return, they're lying," said Owen Donley, chief counsel at the Office of Investor Education and Advocacy at the SEC. "You're probably looking at a fraud."

Sales pitches that lead you to believe that the offer is only available for a limited time or restricted to a special group of people should also be a red flag.

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Also watch for any information that comes with free offers, such as educational seminars that provide lunch or mail offers that include trinkets. Those will make you more likely to respond.

"You have a tendency to believe this person and trust this person," Walsh said. "The one thing we always say about free meals is you don't have to bite on what's being offered."

Find out how they get paid

Be sure to ask a number of questions, including "How do I pay you?" and "How do you get paid?" Walsh said.

The answers could include commissions or fees, but there might be some other method for payment, such as a sales contest or a proprietary product particular to that firm.

Use that information to assess whether the firm is a fit for your risk and liquidity needs, Walsh said.

Know what you're investing in

Be wary of investments that are overly complicated.

"If a retail investor can't understand the investment, they ought not pursue that opportunity," Donley said.

All the information about the investment, such as through filings made with the SEC, should be readily available. If a financial professional won't make documents available, that's a "huge red flag," Donley said.

Check your statements

Monthly statements should show any transactions you made, including the amount.

"Especially in down markets, it can be depressing to look at your statements," Walsh said. "But you have to do it. You have to keep tabs."

If you see something you did not authorize, you should call your broker and send a written complaint to the firm. You should also notify the appropriate securities regulator.

Investors should also do periodic checks of securities they own to see that the prices match up with what appears on their statements, Walsh suggested.