Market volatility and turmoil has consumed our major markets and our collective minds for the past month. VIX readings have trebled, and implied volatility in the futures market has soared. Hedge funds have taken it on the chin and are reining in their positions. There is a lot of uncertainty out there. However, when chaos hits our major markets, the effects are magnified in the world of penny stocks and micro-caps. People rush to sell speculative shares to meet margin calls elsewhere. Pressure selling is never a good thing, but don’t let a scam artist sneak in behind your lowered defenses.
Yes, investment fraud is on the rise, as surely as the seasons are changing. Risk management professionals have been fighting the criminal element for decades, and one conclusion is clear: they are very well organized, well trained, and have carefully crafted schemes designed to separate you from your hard earned capital. Small cracks in your mental defenses are all that is necessary to allow these intruders to pillage and plunder. An overactive market is just the kind of distraction that manufactures these cracks.
And nowhere else doe’s fraud reign as supremely as it doe’s in the sale of early development company stock offerings. If you are committed to prospecting for gold in these waters, then you need to be doubly prepared for the wide array of schemes and scams that will be thrown at you along the way. This episode, as well as the next, will attempt to educate you on what to expect. There is no need to get a PhD in Risk Management. The best way to prevent fraud is to never let it get started in the first place.
Unfortunately, swindlers target people who believe they could never fall victim to an obvious scam. Studies have shown that people with some college or a college degree are the most susceptible to con artist pitches, followed by the elderly as a group. According to the FBI, securities and commodities fraud accounts for over $40 billion a year in ill-gotten gains. Several investment channels made popular by the Internet have become easy targets for swindlers. Lessons can be drawn from their recent experiences.
For example, currency trading requires you to use a broker you never see “face-to-face”. Many that promised extraordinary profits were shams designed to fleece you of your capital. Due diligence reviews of your “unseen” business partners are now more important than ever. Make sure your stockbroker or your Internet trading service is well capitalized with solid balance sheets. Stay with onshore partners, too. Offshore agents do not shield you from tax inquiries, quite the opposite, and attempting to press your legal rights in another country is futile at best. Be prepared to lose your entire account.
You are your first and last line of defense. You must be tuned in to the pitfalls that may be thrown in your path. Beware of unsolicited offers of any kind. Enticing solicitations may be made over the phone, via direct mail or appear in print ads in local newspapers or magazines. Crooks are also adept at using the Internet and emails. Studies have shown that 15% of spamming involves investment fraud of some kind. Only you can listen to your gut in these “marketing” situations. Don’t be shy. Walk the other way!
Awareness and alertness are keys to fraud prevention in today’s hectic electronic world. Now that you mind is attuned to the risks at hand, our next episode will cover many of the specific scams that unfortunately are prevalent in the world of penny stocks. Stay tuned.