A weak stock market so far this year has people worried about the balance in their 401(k) accounts and those of retirement age fretting about lost value. It has also brought out a number of scam artists looking to take advantage of investor nervousness. Consumer protection authorities in Utah are posting warnings about a wave of schemes that begin by convincing people to take their money out of a volatile stock market.
Responsible management of personal finances means making decisions that are sober, fact-based and unemotional. Fraud artists are successful only because they find people who don’t stick to a steady investment plan and are willing to suspend diligence in their investing decisions out of fear, greed or unreasonable expectations. A particular kind of affliction in this category, known as “affinity fraud,” is an ongoing problem in Utah. The regional office of the Securities and Exchange Commission files an average of 20-25 fraud cases in Utah every year, with an average of $25 million in damages, and a lot of them involving victims who found some reason to place trust in the perpetrator. Most of the time, the fraud artist exploits commonalities, like club or church memberships, in which the investor is “let in on a secret way to make big money.”
There is the matter of the Orem man who is accused in a recently filed case of duping hundreds of people out of $28 million in a Ponzi scheme fueled by personal connections to “investors” who then recruited other friends and family members to cash out their savings. There are dozens of other similar examples on the books, with tragic results for the victims who allowed themselves to be convinced that an opportunity that on its face sounded too good to be true was indeed true.
The Utah Department of Commerce’s Division of Securities is warning about a range of investment schemes currently in circulation in Utah that promise to hedge against a drop in the stock markets by putting money into alternative investments. Keith Woodwell, the division director, says, “The best advice is don’t act on bad news and take extra time to weigh financial decisions.”
When the equities markets are on the rise, another form of fraud surfaces in which people are lured into believing there are ways to make even more money. When the market is shaky, the urge is to protect the nest egg by moving money to something else. History has shown that successful investors are those who over the long term stick to a steady plan that acknowledges while markets will often fall, over the long run, they produce steady returns. In the last 20 years, the markets have seen two large slumps, but over that period, the value of an investment in the Dow Jones Industrial Average, for example, would likely have more than doubled.
Investment fraud is a problem of large scope in our community, and it will only go away when the pool of potential victims is limited by people making a personal commitment to remain clear-headed and restrained when making wishfully uninformed financial decisions.