Tips to prevent investor fraud

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It cuts deep into your soul - and pocketbook.

Investment fraud leaves victims financially, mentally and spiritually violated, and often feeling foolish they were taken by the likes of U.S. financier Bernard Madoff and Norbourg former chief Vincent Lacroix.

The two, now serving prison time for using Ponzi schemes to defraud thousands of investors, are visible reminders that you can't be too careful when putting hard-earned cash into the hands of someone given the task of looking after your financial welfare.

While investor fraud has many faces, none is as scary as the virtual, or online, scam, because these fraudsters can be anywhere and remain anonymous, making them difficult to catch.

All the more reason for online investors to tighten the security reins.

"Fraud of any type causes people to second-guess the whole concept of investing," Mark Phillips, managing director, trading and services for Scotia iTrade, says from his Toronto office.

"But people have to realize [fraudulent activity]is such a small component of the industry itself, so industry members are really driving across the message to investors that security comes down to individuals and how they protect themselves."

Don't neglect 'no-brainers'

In announcing Canada's Cyber Security Awareness Month in early October, Public Safety Canada, the RCMP and the Retail Council of Canada armed retailers across the country with brochures on how to protect against cyber-theft crimes.

Some anti-cyber-attack strategies are no-brainers. They include updating computer software, using a firewall and anti-virus software, blocking spyware attacks, securing wireless networks, changing user names and passwords regularly, never opening suspicious e-mails, and checking websites before inputting personal and financial information.

But something as simple as using the "remember password" mode on an account can turn into investment suicide.

Tony Buliga, co-owner of T&L Tax and Finance, a tax-return and bookkeeping business in Windsor, Ont., is a stickler for security while investing in stocks and bonds and managing his portfolio online, sometimes with advice from his broker.

"I just follow all these tips, rules and suggestions [that]all these companies give you with Internet safety, computer safety - as long as you do that, you're as secure as you can get," says Mr. Buliga, 44. "As well as those, I always use my own computer at home - and I don't use a cellphone if I'm talking to an investment adviser or broker, because police scanners can pick up cellphone frequencies and the information given when you're on them, like account information and phone numbers."

Some avoid the Web

At the other end of the spectrum is Mary-Anne Talbot, a real estate agent with Re/Max Hallmark Realty who uses Craigslist and Facebook on the job, but refuses to do any online banking or investing.

Despite money-back protection guarantees by banks and other institutions offering online investing, Ms. Talbot says she would rather continue to buy her RRSPs and other investments through her financial adviser - in person.

"I don't believe anything is secure," says Ms. Talbot, who has already had a credit card and a debit card compromised. "Once your personal information is out there [in cyberspace] it's out there and things are getting sophisticated."

High-profile events such as the Olympic Games, world crises such as hurricane and flood relief efforts, and anything involving celebrities or politicians tend to attract scammers, who attempt to trick Internet users into providing personal and financial information.

Other gimmicks include stock fraud, offshore investment scams, Ponzi (pyramid) schemes and investment seminars.

Industry takes steps

But financial institutions and securities regulators also have ramped-up security features and measures, including:

Using encryption for online transactions or when customers are asked for personal, financial or other information. Encryption means information that flows between the consumer's and financial institution's computers is encoded. Not allowing third-party transactions so money can't be transferred to an outsider's account.

Not including personal information in online accounts, to reduce the risk of identity fraud.

Monitoring any unusual online trading patterns by the customer.

There's evidence such fraud-proofing is starting to make headway.

The Canadian Securities Administrators' Investor Index 2009, a survey of 1,004 adults conducted by Ipsos-Reid in July, found just under 38 per cent of respondents believed they had been approached with a possible fraudulent investment, a level consistent with research in 2006 and 2007, says Mark Dickey of the Alberta Securities Commission.

However, among those approached, a much lower number - 21 per cent compared with 38 per cent in 2006 - said all fraudulent attempts came via e-mail spam, according to the 80-page report, about one-quarter of which focuses on investment fraud data.

While the downturn in the economy has some people looking for that financial rainbow at the end of the storm, Mr. Phillips reminds consumers of that old adage: "If it looks too good to be true, it probably is.

"You need to be smart and educated about what you're doing and not get caught up in the hype of a quick return. Don't be blindsided."

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PREVALENT SCAMS

Some of the most common online investing scams involve spam e-mails, which are unsolicited, usually promote a product or service, and are cheap and easy to create, so can reach thousands of potential victims at one time.

Here are a few common spamming methods:

Affinity fraud

Targets groups of people who know each other, such as members of online communities or social networking websites, where people share information in chat rooms and by forwarding e-mails. Victims are often friends or family who innocently share information about the fake investment scheme.

Ponzi schemes

Investors are recruited typically through promises of quick, high returns. Be wary of e-mails that promise you can "make big money working from home" or "turn $10 into $20,000 in just six weeks." Early investors may receive returns fairly quickly from "interest cheques," so they reinvest, or recruit friends and family as new investors. But the catch is the investment doesn't exist. The interest cheques are paid from the contributions of new investors. The scheme eventually collapses when the number of new investors drops.

The pump and dump

Typically, an online user receives an e-mail promoting an incredible deal on a low-priced stock, but he or she isn't told that the person or company touting the stock owns a large amount of it. As more investors buy shares, the value skyrockets. Once the price hits a peak, the scam artist sells the shares and the value of the stock plummets, and the investor is left with worthless shares.

Source: Canadian Securities Administrators' guide "Protect Your Money: Avoiding Frauds and Scams"