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Know the signs of a potential investment scam

The sales pitches sound too good to be true.

Earn a 7.1 percent guaranteed annual return by investing in safe mortgages, almost double the going rate on comparable bank certificates of deposit.

Earn a fixed 10 percent annual return by investing in condominiums in Maine, more than triple the yield on the federal government's ultra-safe 10-year Treasury notes and roughly what the stock market returns in a slightly above-average year.

There was only one problem.

The pitches were too good to be true. Both were at the center of scams that local authorities allege raised nearly $10 million from more than 500 investors, who now are facing the loss of some or all of their money.

And that's just the local scams, which pale in comparison to the massive Ponzi scheme that New York City money managers orchestrated to swindle $50 billion out of investors, including a handful of clients from the Buffalo Niagara region.

Those investment scams, and a host of other schemes that have unraveled in recent months as the stock market has plummeted, show that even well-heeled and supposedly sophisticated investors can be lured into making unfortunate mistakes by appealing promises.

"People are looking for an easy way to get rich or get a guaranteed return," said Gerald T. Cole, the managing partner at Arbor Capital Management, an Amherst money management firm. "It usually doesn't work out that way."

The lesson, local investment advisers and authorities said, is to never let your guard down with your investments and don't be too trusting.

"None of these people even knew where their money was," Cole said. "That should be a red flag."

One problem is that many of the scams aren't based around traditional stocks, bonds or mutual funds, which are traded on public exchanges and required to make regular financial reports to investors.

"I would only want to put my money in investments that I can check on," said Richard K. Schroeder, an Amherst money manager.

Instead, many scams, like the real estate investments allegedly orchestrated by Watermark Financial Services Group in Amherst and the mortgages that Richard S. Piccoli supposedly based his Ponzi Scheme around, hinge on unregistered securities that are hard, if not impossible, for the average investor to track.

"Why would you buy anything that you can't look up in the newspaper or on the Internet? I just wouldn't trust it," Schroeder said. "These regulated investments may be highly risky, but the risk of fraud is almost zero."

Compounding the problem, especially in Madoff's case, is that the New York City money manager also ran the broker-dealer that kept possession of Madoff Securities' assets, allowing him to issue the false statements that kept investors unsuspecting and allowed the Ponzi Scheme to keep running.

"The main issue is who's holding your assets," Cole said. "Somebody had too much control over the assets and the flow of funds."

Both Schroeder and Cole said their investment firms do not take possession of their investors' funds. Instead, an investor's money is held by a separate brokerage firm or bank, which issues their own periodic statements. Be especially suspicious if the adviser requests that the check be made out to them, and not the custodian that handles the account.

"Unlike Madoff, we have no access to your account, except to purchase or sell securities," Arbor Capital wrote to its investors last week.

So how can you keep from falling victim to an investment scam? Experts offer these suggestions:

*Be wary of promises of unusually large, or guaranteed returns. Watermark's Guy W. Gane Jr. promised investors that the Watermark debentures he was pushing would provide them with a fixed 10 percent annual return, prosecutors alleged. That was more than double the average yield on ultra-safe 2-year U.S. Treasury notes at that time.

To further entice investors, Gane and his partner, Lorenzo Altadonna, even offered to pay any fees the potential clients might face by selling other investments, the Securities and Exchange Commission charged.

*Watch out for promissory notes. These interest-paying investments are prime fodder for scam artists. Watermark, for instance sold short-term promissory notes to four investors that promised annual yields of 12 percent to 42 percent, the SEC alleged.

Securities regulators warn that even legitimate promissory notes are suitable only for sophisticated or corporate investors with the resources and ability to research the companies issuing the notes and gauge whether they will be able to make their promised interest and principal payments, the North American Securities Administrators Association warns.

*Check out the investment adviser thoroughly. See if the adviser has been disciplined for past indiscretions through the Financial Industry Regulatory Authority. Even a simple Internet search on the adviser or investment fund could turn up helpful information.

*Stay in charge of your money. Review statements and other related materials, such as a prospectus. If your adviser or investment fund invests in other funds, understand where that secondary fund is investing. And don't be afraid to ask questions.

*Keep good records relating to your investments. Take notes on conversations and meetings you have with your adviser, the securities administrators group recommends.

"If it sounds like it's smoke and mirrors, it probably is smoke and mirrors," Cole said.


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