Sunday, April 4, 2010

Things you can do to avoid investment fraud

It's not always possible to protect yourself from market fluctuations, but unless you panicked and sold securities at the bottom a year ago you’ve made up much of the decline in value of your investments. But when fraud is involved money doesn’t come back so it’s important to find ways to protect your nest-egg.

1. Where is your money held? Madoff held funds in his own company. Best if there’s an independent broker who does transactions and sends statements and the advisor makes investment decisions but does not actually handle money. Madoff’s statements and trade confirmations were phony.

2. Should have independent audit of broker.

3. Private-placement securities are stocks, bonds or other instruments issued by a corporation to investors outside the public markets. They tend to be riskier than traditional securities in part because the companies usually don't have to register the deals with the Securities and Exchange Commission. This is what Vaughan allegedly was doing. Check things out with an independent advisor.

4. Trust your advisor but verify. Start by contacting your state securities regulator to see if the issuer, brokerage or person selling the security is licensed to do business there or has a record of problems. Investors also can get more information about the disciplinary record of any Finra-registered broker or brokerage firm by using Finra's website.

5. If you don't understand it don't do it – a Buffett rule

6. Don’t invest everything in a risky private deal. Only what you can afford to lose.

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