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Thursday, May 10, 2012

Highline Students Learn about Investment Fraud

Blog from Jeremy Lushene, education and outreach for DFI

I had the opportunity to speak to Highline Community College students about investment fraud as part of their ongoing investment club education series.

We started the workshop by profiling the typical investment fraud victim. Fragile, trustworthy grandma? No! Try a 55-65 year old male, college educated, and with above average financial literacy.

Wait, above average financial literacy? Yes, a 2006 FINRA Investor Education Foundation-funded research study found that investment fraud victims scored higher on financial literacy tests than non-victims.

From there we covered the common persuassaion tactics that scam artists use:
  • Phantom riches - Dangling the prospect of wealth by enticing investors with something they want but cannot have. “These gas wells are guaranteed to produce $6,800 a month in income."
  • Source credibility - Trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience. “Believe me, as a senior vice president of XYZ firm, I would never sell an investment that doesn't produce.”
  • Social consensus - Leading individuals to believe that other savvy investors have already invested. “This is how ___ got his start. I know it's a lot of money, but I'm in—and so is my mom and half her church—and it's worth every dime.”
  • Reciprocity - Offering to do a small favor in return for a big favor. “I'll give you a break on my commission if you buy now—half off.” 
  • Scarcity - If something is rare or scarce, it must be more valuable.“We have had a run on this stock like you can’t believe – we only have 2,500 shares left out of an initial supply of 300,000.”
We also quickly went over some of the common scams we are seeing now
The tips I gave these young investors to help them avoid fraud?

Always research your investment! Check that the investment and the seller is registered with the Department of Financial Institutions. Also, if it sounds too good to be true, it probably is!