In the world of investing, the promise of high returns can sometimes be too tempting to resist. Unfortunately, this allure can open the door to investor scams, which can leave individuals financially devastated.

The FBI and other agencies recently raided Paramount Management Group, a Lancaster-based company leveraging ATM networks, which was recently hit with a court-ordered $138 million judgment. Now, the court must determine if it lied to investors about assets and double-digit returns. This situation highlights how seemingly promising investments can unravel, leaving investors grappling with substantial losses. Such events serve as a sobering reminder of the critical need for due diligence and risk assessment before committing to any financial venture.

Avoiding these types of investment traps requires vigilance, research, and a healthy dose of skepticism. Here are key strategies to protect yourself and your investments.

Understand the Red Flags

To avoid scams, it’s crucial to recognize warning signs. Offers that promise high, guaranteed returns are a significant red flag, as no legitimate investment is without risk. Be cautious of pressure to act immediately, as scammers often create a false sense of urgency to prevent you from critically evaluating the situation or seeking advice. Additionally, unregistered securities or sellers signal potential danger. Investments not registered with regulatory authorities, such as the SEC, warrant close scrutiny. Take a moment to pause and carefully assess before moving forward.

Research the Opportunity

Due diligence is your best defense against scams. Begin by investigating both the investment and the individual or company offering it. Verify the credentials of brokers and investment advisers using resources like the SEC’s Investment Adviser Public Disclosure or FINRA’s BrokerCheck. Take time to analyze the investment by researching the company’s financials, market performance, and position within the industry.

Legitimate opportunities are typically transparent about their business model. To ensure an investment is legitimate, investors should request key documents, including a comprehensive business plan, audited financial statements, and legal documents like articles of incorporation and regulatory filings. For securities, ask for an offering memorandum or prospectus. Review contracts with key partners, proof of intellectual property ownership, and a capitalization table. Verify regulatory compliance and check the backgrounds of executives.

To assess if a private placement investment provides sufficient information, review the Private Placement Memorandum (PPM) for details on the business, financials, risks, and terms of the offering. Ensure the disclosure covers material information, including securities terms, conflicts of interest, and use of proceeds. Verify compliance with Regulation D requirements, especially regarding adequate disclosures for non-accredited investors. Evaluate the issuer's communication and marketing practices for potential omissions or misleading statements that could violate antifraud provisions.

Red flags include a lack of documentation, (especially skipping paperwork and legal requirements,) unrealistic projections, and high-pressure tactics.

For large investments in a private placement investment, insist on an independent audit. Independent auditors can help validate claims, ensuring transparency and informed decision-making. Auditors should also look for prior complaints filed with regulatory bodies.

Avoid Unsolicited Offers

If you receive an unsolicited email, phone call, or social media message offering an investment opportunity, proceed with extreme caution. Reputable firms don’t cold-call potential investors or send unverified pitches. Ignore and report such communications to the appropriate authorities.

Beware of Ponzi and Pyramid Schemes

Ponzi and pyramid schemes remain some of the most prevalent scams. They rely on recruiting new investors to pay returns to earlier ones, rather than generating legitimate profits. In recent years, there have been some very well-disguised schemes, but there are always a few warning signs.

• Beware of claims of consistent returns regardless of market conditions.
• If they claim to have a new model or have discovered a new way to make money, steer clear. This is a common scam tactic. Even if you believe them to be legitimate, new ways to make money are almost always very high risk, and usually end in losses.
• Make sure you understand the business model. If any part seems vague, improbable, or highly counterintuitive, take a step back and double-down on your research.

Use a Trusted Financial Adviser

A trustworthy adviser can provide clarity and help you make informed decisions. Engaging a reputable financial adviser can help you avoid dubious investments.

Look for advisers with:

• Verified credentials and licensure,
• A fiduciary duty, meaning they are legally required to act in your best interest.
• Make sure your advisor's securities and advisory services are overseen by a compliance organization registered with FINRA/SIPC and vetted by a Registered Investment Advisers. This level of oversight is in place to ensure all transactions and recommendations meet fiduciary duties and comply with state and federal requirements.

Verify Through Regulators

Regulatory bodies like the SEC and FINRA offer tools to verify investments and advisers. Additionally, check the company or individual against the Consumer Financial Protection Bureau (CFPB) or Better Business Bureau (BBB) for complaints.

Stay Skeptical

Finally, if something feels off, trust your gut. Scammers often exploit emotions like fear or greed, making you ignore logical inconsistencies. Taking a step back and seeking a second opinion can save you from falling into a trap.

Remember that All Investments Present Risk

All investments come with risks, so only invest money you can afford to lose. To reduce exposure, diversify your investments across different options and include low-risk choices like bonds or CDs in your portfolio. Consider your long-term risk tolerance as well—if you experience losses, how much time will you need to recover financially? Balancing your investments and planning for potential setbacks are key to managing risk effectively.

All investing involves risk, and you should be prepared to accept potential losses, including the loss of principal. The value of investments can fluctuate, and past performance is not indicative of future results. There is no guarantee that any investment strategy will achieve its objectives or provide positive returns. You should carefully consider your financial situation, investment goals, and risk tolerance before making any investment decision.

Want to Learn More?

Investor scams are an unfortunate reality, but they can be avoided with proper vigilance and due diligence. By understanding the red flags, researching opportunities, and seeking advice from trusted professionals, you can protect yourself and your financial future. If you're concerned about a potential investment, contact Mirus Financial Partners for a second opinion. We'll help you evaluate your investments, assess risk, and make recommendations based on your financial goals.

Mark A. Vergenes is President of the MIRUS Financial Partners, 8 N. Queen St., Mezzanine, Lancaster, PA; 717-509-4521 or mark@mirusfinancialpartners.com An Investment Advisor Representative offering securities and advisory services offered through Cetera Advisor Networks LLC., member FINRA/SIPC and a registered investment advisor. Cetera is under separate ownership from any other named entity.  MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.