June 2020
Investor Alert for Seniors: Five Red Flags of Investment Fraud
The article you are about to read deals with the timeless dilemma that investors face: Trusting an investment adviser because you think you know the person or company well. That person could be a member of your church or fraternity. It could even be a company that has been advertising on television and radio for years. This alert was dated June 15, 2015, but is equally pertinent to all decades past and present. For instance, the SEC filed a complaint May 20, 2020 against Paul Horton Smith, Sr. and his various entities. The SEC alleges that:
“Defendants are conducting an ongoing Ponzi scheme targeting senior citizens, and engaging in other fraudulent conduct, in violation of the federal securities laws. From at least January 2018 through the present, Paul Horton Smith, Sr. (“Smith”) offered and sold securities in his company, Northstar Communications, LLC (“Northstar”), in conjunction with his state-registered investment advisory firm, eGate, LLC (“eGate”), and his insurance and estate planning company, Planning Services, Inc. (“Planning Services”). Smith and Northstar assured investors that their principal would be safe and secure invested in purported “private annuity contracts,” and they promised investors guaranteed annual interest payments between 3 percent and 10.5 percent. In reality, Smith’s and Northstar have not invested any investor funds in any securities, their representations to investors were false and misleading, and omitted material information.”
The alert reprinted below is from the SEC website at https://www.sec.gov/oiea/investor-alerts-bulletins/ia_5redflags.html but see other informative links below.
Older Americans are often targets of investment fraud. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help seniors identify signs that what is offered as an investment may actually be a fraud. Below are five “red flags” seniors should look out for when making an investment decision.
Promises of High Returns with Little or No Risk. The promise of a high rate of return, with little or no risk, is a classic warning sign of investment fraud. Every investment carries some degree of risk, and the potential for greater returns generally comes with greater risk. Avoid putting money into “can’t miss” investment opportunities or those promising “guaranteed returns.” Remember – if it sounds too good to be true, it probably is.
Unregistered Persons. Always check whether the person offering to sell you an investment is registered and licensed, even if you know him or her personally. Unregistered/unlicensed persons who sell securities perpetrate many of the securities frauds that target older investors. Researching the background of the individuals and firms selling you investments, including their registration/license status and disciplinary history, is free:
- Search the SEC’s Investment Adviser Public Disclosure (IAPD) online database.
- Search the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck online database.
- Contact your state securities regulator.
You can also call the SEC’s Office of Investor Education and Advocacy directly to help research the person and firm selling you the investment. Our direct number is (800) 732-0330 and we are open from 9:00 a.m. to 5:30 p.m. (Eastern Time) Monday through Friday.
Red Flags in the Financial Professional’s Background. Even if an investment professional is in good standing with his or her regulators, you should be aware of potential red flags in the professional’s background. SEC, FINRA, and state securities regulator records can be used to identify red flags for potential problems, including: (1) employment at firms that have been expelled from the securities industry; (2) personal bankruptcy; (3) termination; (4) being subject to internal review by an employer; (5) a high number of customer complaints; (6) failed industry qualification examinations; (7) federal tax liens; and (8) repeatedly moving firms.
Pressure to Buy Quickly. No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you’ve got to “act now.” If someone pressures you to decide on an investment without giving you ample time to do your research, walk away.
Free Meals. Be wary of “free lunch” seminars. The ultimate goal of free meal investment seminars is typically to lure new clients and to sell investment products, not to educate the public. If you decide to attend one, commit to yourself before the seminar that you won’t purchase anything or open an account while at the seminar. Even if the free meal does not come with a high-pressured sales pitch, you should expect the “hard sell” in subsequent contacts from the person selling the investment.
Additional Resources
- If you are thinking about investing and have any questions, do not hesitate to call the SEC’s Office of Investor Education and Advocacy at (800) 732-0330 or ask a question using this online form.
- “Free Lunch” Investment Seminars: Avoiding the Heartburn of a Hard Sell: A FINRA Investor Alert about “free lunch” investment seminars.
- Ask Questions: For a list of questions you should ask when considering an investment, please see Ask Questions: Questions You Should Ask about Your Investments. Esta publicación también está disponible en Español.
Investors can also order hard copies of our free publications by calling (800) 732-0330, or access them on the Internet through the SEC’s Investor.gov website. For additional educational information for investors, see the SEC’s Investor.gov website or the SEC’s Office of Investor Education and Advocacy’s homepage.