How to Recognize a Fraud
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How many ways are there for investors to be cheated? Let me count the ways. No one can. There can be as many ways to cheat investors as there are swindlers, con artists, and unscrupulous brokers, and there are lots of those.
What are some of the tell-tale signs investors should look for to help determine whether a recommendation is more likely to be naughty than nice? What are the warning signs? No single red flag is determinative. But, here are a few clues. If a few show up, you would do well to be wary.
The Product:
The company, or the broker, claims that the company has developed the greatest product since false teeth; and despite having only three employees, says it expects to compete with - and beat - Microsoft, Coca Cola or Eli Lilly.
The company claims to make something you have never seen or heard, and cannot comprehend, but it seems to involve a secret patent and some gighertz or multiclonal antibodies or megapixels or mishuggass. or something.
The company claims to make something that you have seen before - but only in science fiction movies.
The Business:
The company has recently changed its line of work in unlikely ways (from, say gold mining to biotechnology or food service to telecommunications).
The company does most of its business in a place where most amateur investors are unlikely to pay it a casual visit (Uzbekistan, the Artic Circle, the Pentagon).
The company is constantly announcing "major contracts" or "strategic alliances" with "major corporations" (often unnamed). Revenues from these deals, however, never seem to materialize.
The company has to retract announcements of major contracts or business agreements. (AT&T has never heard of Scamco or points out that their "alliance" consists of AT&T agreeing, for a fee, to provide phone service).
Location:
The company is based in Florida. (The weather is good, real estate is cheap, and state law allows you to keep your mansion, no matter what.)
The company is based in Vancouver, British Columbia (lovely scenery, spotty stock market).
The company is based in Salt Lake City, land of the shell corporation.
The Offices:
The company's headquarters, when visited, turn out to be in an office suite that has one receptionist answering the phone for 13 different outfits.
The company's offices, when visited, turn out to be in an apartment building, strip mall or ministorage operation.
The company's offices, when visited, do not exist.
The Stock:
The stock trades on the NASDAQ OTC Bulletin Board. Despite the NASDAQ name, the bulletin board has no listing standards, and companies traded on the bulletin board generally do not file reports with the SEC.
The stock trades "in the pinks", the slang term for the pink sheets, which are listings of stock quotes of very small or obscure companies.
The Management:
The president of the company has presided over two or more previous ventures that went bankrupt.
The president of the company is a felon, a disbarred stockbroker or lawyer.
The president of the company takes calls from potential investors with $1,000 to spend; and takes those calls at home, at night, in the car, or in the hospital.
Nobody answers the company telephone and there's no voice mail.
Going Public:
The company went public in an initial offering featuring units (bundles of stock and warrants). These deals are favorites of sleazy underwriters because they are easy to manipulate.
The company went public through the "rear end" by merging with a defunct company (known as a shell) that still has shares outstanding. These deals allow companies to avoid regulatory scrutiny.
The company never went public a tall, as far as anyone can tell; but somehow the shares magically started trading.
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