For three months, Leroy Clingwall thought he had hit the jackpot by investing in emerging-market ETFs. The investment company, Cyprus-based Genius Funds, had a professional-looking website that had been around for three years, and his father had already invested in the fund, as had the family's financial adviser.
Weekly reports from Genius Funds assured Mr. Clingwall, a 25-year-old student from Kelowna, B.C., that his $1,000 investment was making 300-per-cent returns. It wasn't until July, 2010, that he realized he'd been scammed. A friend told him of a website that claimed Genius Funds was operating a Ponzi scheme, and further research revealed warnings from several Canadian securities regulators about the company.
Calls to Genius Funds went unanswered, its website soon disappeared and the company's e-mails stopped arriving. "I lost every penny I invested and was not able to recoup any losses through legal action," Mr. Clingwall said. His father lost even more: $20,000.
Unfortunately, investment fraud is fairly common. The Canadian Securities Administrators, which is responsible for the securities regulations of all provinces, says one in 20 Canadians has fallen prey to investment fraud. Almost one in five know a friend or family member who has been a victim, and four in 10 have been approached with a fraudulent investment opportunity.
As for Mr. Clingwall, he has signed up for the Canadian Securities Course and now invests through a reputable financial adviser. He suggests investors avoid anyone promising unusually high returns, ask to see a company's historical holdings before investing, and be suspicious of companies based in countries without an extradition agreement with Canada.
"Do your due diligence," Mr. Clingwall said. "In my case, the lack of disclosure should have been a huge sign, but I got greedy."
Here are some additional tips from the CFA Institute, which oversees the Chartered Financial Analyst designation, on how to avoid investment fraud:
1. Clearly understand the investment strategy.
Complex jargon can hide suspicious inconsistencies. Ask an investment professional to explain unfamiliar language.
2. Match the investment strategy to the reported performance.
Compare the adviser's performance claims with commonly available benchmarks. Are they credible?
3. Avoid e-mail solicitations.
E-mail lists are easy to obtain and easy to send, so treat unsolicited e-mail claims with great suspicion.
4. Be aware of those offering "sure things," quick returns and special access.
Legitimate investment professionals do not promise sure bets, so understand how you can redeem shares or exit the investment and be alert to such red-flag promises.
5. Understand what, if any, regulatory oversight exists.
Regulation varies by type of investment firm, so pay attention to who is looking out for you and how. That way, you will know which regulator to turn to if things go awry.
6. Assess the operational risk and infrastructure.
It is important that a firm have separate operations for asset management, trading and custody. Your portfolio manager should not have custody of your money. Ask about these firewalls and if the firm complies with the Asset Manager Code of Conduct.
7. Assess the people involved.
Does your financial adviser have professional credentials? Does he or she abide by a professional code of ethics that places your interests ahead of their own?
8. Limit your exposure.
Diversification is one of the most fundamental and enduring investment principles.
9. Perform a background check.
Do your due diligence: Check the disciplinary history of your potential or current adviser before making a decision.