The investment community has often heard those now-familiar words: “If it seems too good to be true, it probably is” when warning against stock broker fraud. Not only is this phrase only partially true, it’s dangerous. Investors who only watch out for the investments that are “too good to be true” are still vulnerable to the ones that aren’t. Many investment scams don’t offer the high returns without risk. In fact, Pat Huddleson, a former enforcer for the Securities and Exchange Commission, stated that he’d witnessed scams that promised much smaller returns, such as 5 percent.
According to Huddleson, “If it sounds too good to be true, you’re probably talking to an amateur scam artist. That is, only a rookie or somebody who’s really dumb will promise you the moon, because that scares people away.” In fact, the clever scam artists will not promise you so much that you will think it’s a scam. A 5 percent return isn’t enough in itself to raise a red flag. Huddleson goes on to say that “they really are students of human behavior in a way that would make a Ph.D. in psychology proud. They’re really good at observing you. In the middle of a pitch they can change the way they’re approaching the thing. If they see a facial expression, even, that you’re not buying the thing they just said, they’ll change course.” Despicable as it may be, scamming is a skill and some are very talented at it.
Some ways Huddleson suggests for investors to protect themselves are to get a C.R.D. from the state securities commissioner, and to recognize your own human limitations and vulnerability to scammers. He cites Bernie Madoff’s victims as proof that even the “most sophisticated people in the world” can be victim to fraud. Put plainly, those who believe they are invulnerable to fraud create their own vulnerability.
The fact is, the old “too good to be true” adage is, well, too good to be true.