People don’t like to think they could fall for investment scams. We’re too smart, too savvy. We were diligent about our research. But the truth is fraudsters invest a lot of time in manufacturing a convincing façade. The best way to help protect yourself is to be informed – understand the risks of the investment, closely monitor your account, and make sure your financial professional is registered with a state or federal regulator, or a self-regulatory organization such as the National Futures Association (NFA) or the Financial Industry Regulatory Authority (FINRA).
Understanding the Lengths Fraudsters Will Go
Hunter Wise Commodities, prosecuted by the U.S. Commodity Futures Trading Commission (CFTC), is a bold example of the great lengths scammers will go to wreak havoc on investors. Until 2013, the proprietors of Hunter Wise touted themselves as operators of a prosperous precious metals investment company, but in actuality they defrauded thousands of hard-working investors to the tune of $46 million. The operation included a convincing sales staff, a storage facility in Delaware, partner brokerages such as NewBridge Alliance, and a sophisticated online presence. They thought through every last detail, right down to faked statements and company brochures. It looked like an impressive operation. The problem was there was never any gold, silver, platinum, palladium, or copper. It was all a well-fabricated ploy.
Even for a skeptical investor, the warning signs were hard to spot. Bob Bauman was one of those investors. He’d had experience trading in the stock market and a background in accounting, but when he got a call about a silver investment opportunity, it seemed legitimate. Bob is sharing his story so others can learn about the warning signs of fraud and investor tools available to help avoid a similar fate.
Learning from Bob: Tips for Protecting Your Investments
It’s easier to learn from first-hand experiences, so let’s dig a little deeper into some of the key lessons from Bob’s involvement with Hunter Wise.
It started with a cold-call. A salesperson contacted Mr. Bauman with a “great opportunity” to invest in precious metals. But he didn’t call just once. The salesman kept calling until Mr. Bauman decided to hear him out. The salesman made predictions about market values suddenly rising, and discussed how current events could affect the prices of precious metals. In reality, he was taking advantage of common misconceptions about precious metal security and cherry picked historical values to make the point.
SAFE INVESTMENT TIP: Prepare a refusal script or block the numbers of these types of sales offers.
Another key element of the Hunter Wise scam was the idea of investing on leverage. The salesman convinced Mr. Bauman to use a margin loan to buy silver. Leverage allowed Mr. Bauman to make substantially more money when the price of silver went up, so that an increase of 10%, for example, could result in profits of 40%. It was the increase in profits that the salesman touted. But leverage has a downside too. Mr. Bauman had to keep a certain amount of money, equal to 10% of the value of the metal, in the account. If prices went down, Mr. Bauman would have to contribute more funds to keep his position. A small move in the price of silver against the position could wipe him out.
In reality, Hunter Wise never purchased any precious metals. Instead, they simply tracked the value of Mr. Bauman’s position as the prices for silver increased and decreased.
SAFE INVESTMENT TIP: Avoid putting vital funds such as retirement savings into short-term, high-risk investments involving leverage.
Mr. Bauman’s statements were showing really good gains, so he felt that his money was secure. What he didn’t realize was that the statements were part of the ruse.
SAFE INVESTMENT TIP: Check statements closely. If you’re seeing unusually large gains, or the statements don’t seem comprehensive (are missing account numbers or basic information), question it.
Once investors like Mr. Bauman saw good returns on their statements, the Hunter Wise brokers began pushing them to increase their buying at an accelerated pace. Each time the customers bought more silver, the brokers made more in commissions. Mr. Bauman, believing the statements and gains were real, fell into the trap. He was convinced that controlling more of the precious metal would pay off even more.
SAFE INVESTMENT TIP: Find out how your broker is paid. If he or she is paid a per-trade commission, watch out for pressure to trade at an uncomfortable rate. Unauthorized trading, churning, urging you to invest more and more money or to invest in risky transactions are all big red flags that something’s not right.
When it comes to money, it can be difficult for even the smartest, most sophisticated people to distinguish truth from lies. That’s why it’s important to check registrations with national and state regulators. A significant amount of fraud is committed by people or firms that aren’t registered. A registered professional undergoes a background check, must pass required tests and meet other standards; a registered firm must submit to regular examinations and supervision by regulators.
Registration is not a guarantee that fraud won’t happen to you, but in many cases you will have at least some recourse if fraud were to occur.
Professionals and firms register with the NFA and the CFTC if they sell products covered by the Commodity Exchange Act, such as commodity futures and options, foreign exchange, and other derivatives. Securities broker-dealers and investment advisors are registered with FINRA, and the U.S. Securities and Exchange Commission. If people or firms break the law, the government could take them to court. If they don’t abide by NFA or FINRA rules, they can be punished. This would include fines, suspensions or banishment from the industry. All of these records can be reviewed using the tools at SmartCheck.gov.
If a search returns “0 results” or “No Current Status” in one of the databases linked to from SmartCheck.gov that means the people or firms aren’t in the database or aren’t registered. Also, look at their professional history. Do they have a history of complaints? Have they bounced around from one firm to another, or were they associated with firms that have been kicked out of the industry? If the person handling your money isn’t registered or has too many black marks on their records, consider working with someone else.
Watch Bob’s story below for a firsthand account of his experience. This will increase your investor knowledge and help you protect yourself and your hard earned funds.