Four ways investors can avoid frauds, scams and ripoffs

James Elton Warr didn’t catch investors by promising astronomical returns; he got them by comparing his results – which he promised would continue – against the stock market.

But the Warr Investment Group of Austin, Texas, was showing its purported 8 percent annual gains against a particularly poor time frame for the stock market in order to look good. And Warr wasn’t even running his investment business during the time frame he was showing, much less delivering those returns when the market was sour.

According to the Texas State Securities Board – which forced Warr Investment Group into receivership earlier this year – Warr raised about $1.1 million from investors; he used a significant portion of the funds to pay commissions to unregistered sales agents, to cover his travel and dining expenses, and to buy an E350 Mercedes Benz.

Instead of getting their promised 8 percent annual returns from his real estate program – which he promoted as both safe and lucrative in Internet advertising and YouTube videos – investors were lucky to get away with a loss of 66 percent. They were lucky because the Texas regulators got there before all of the money and assets were gone.

It is every investor’s worst nightmare, being a sucker for a scheme or fraud, a fish for the stock tout whose only motives are their own profits. Regulators acknowledge that they typically don’t do enough to protect investors, that they only arrive well after the crime has started and that their recovery rates are small. With that in mind, however, they say that investors can protect themselves from scams.

“It’s not hard to protect yourself,” said attorney Michael Unger of Rubin & Rudman in Boston, a former director of the Massachusetts Securities Division. “If it sounds too good to be true – even just a little too good – well, you can fill in the blank on how to end that sentence.”

While regulators would have a long list of safeguards and checks, here are four efforts that, if done properly, will defuse most rip-offs.

Check the registration of the adviser and the securities. One call to the state securities administrator in your area should be sufficient to make sure the basics are in place.

“People can call to find out if the guy they are working with is registered, and if the securities they are buying – especially when we are not talking about big stocks or mutual funds but something like a ‘private annuity’ – are registered,” said Robert Elder of the Texas State Securities Board.

Dig into illustrations and comparisons for inconsistencies and nonsense. The same way that legitimate investment firms don’t advertise the returns of their worst funds, the promoters of investment frauds and scams fail to disclose key facts, and make statements and comparisons that fall apart under scrutiny. Goofy comparisons also can involve a tout lumping themselves in with famous investors.

In April 2011, for example, the “Elite Stock Report” issued a “special report” touting Tuffnell Ltd., a micro-cap gold stock. The promotional piece compared Colin McCabe, the newsletter’s unknown editor, with billionaire money managers George Soros, John Paulson and Eike Batista.

While the billionaires had been reported as buying gold at the time, they weren’t doing it through penny stocks. Within weeks, Tuffnell stock had cratered; today it trades for fractions of a penny per share.

Be careful about who gets the check. Writing the check to a big brand-name firm that is protected by the Securities Investor Protection Corp. is good, writing it out to some small adviser or the adviser’s firm is a huge red flag.

In 2004, when a 15-year Ponzi scheme run by Boston financial planner Brad Bleidt hit the news, it included one curious fact. Unlike many scammers who are simply ripping customers off or selling fake investments, Bleidt had many customers in real investments getting genuine returns from his financial maneuvers.

The deciding factor in who got real advice and who got ripped off came down to who the checks were payable to. Money written to the clearing firm that Bleidt used as a custodian for assets were managed properly because he couldn’t touch them; checks made out to his firm, Allocation Plus Asset Management, wound up in Bleidt’s personal account.

“Who gets the check matters,” said Unger. “You’re giving your money to John Smith & Associates and it may feel like you are doing the right thing, but you could be putting your money right into the hands of the adviser.”

Talk to your family – or someone you trust besides the salesperson – before investing. Your family may not know better about money than you do – and you may worry that their recommendations are based on their desire to someday have your money themselves – but they provide a great sounding board, just in case you haven’t recognized the sound of “too good to be true.”

“One hopes that family always has your back and is going to at least give you a sounding board for your decision to invest in uniforms for the Japanese army – that’s an actual case – or whatever you are being sold,” said Bryan Lantagne, director of the Massachusetts Securities Division.

But family is also important because “seniors have the money and are, more often than not, the target of these folks. We have, over the years received many a call from family members saying that their folks had talked to them about a call they received that just didn’t seem right.”

Massachusetts had a case several years ago in which the firm it sued had internal training materials instructing agents to tell seniors not to discuss the investment deal with their kids, Lantagne said.

Telling the story of a potential new investment to a loved one forces individuals to make sure they understand what they are buying – if you can’t explain it, you probably don’t know enough to buy it, regulators say – and gives you a counterpoint.