Investors are often given assurance about the potential return of a particular investment product by the same individual who is selling the investment product. How should investors protect themselves against such potentially fraudulent transactions?
The U.S. SEC guidance on avoiding investing in Ponzi Schemes that involve securities fraud might also be useful for art investors.
“Many Ponzi schemes share common characteristics. Look for these warning signs:
- High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
- Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
- Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
- Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
- Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.”
In general, investors should demand transparency and should be careful when they are not sufficiently informed to monitor their investments. This is particular problem when investing in art because of the difficulty in predicting the value of each piece and the opaqueness of the art market.
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