'Trust but verify':' Good way to avoid investment fraud, says SEC official

“Trust but verify.” President Reagan made the phrase popular, but Richard Best uses it a lot these days. The regional director of the Securities and Exchange Commission repeated it recently while speaking to the Rotary Club of Salt Lake City as he warned about avoiding investment fraud.

“One of the biggest issues that I’ve seen is that it doesn’t matter which audience I speak to. It doesn’t matter if I speak to someone who is unsophisticated, has never invested, or I speak to someone who is running a fi - nancial institution. There’s one common thought: ‘It can’t happen to me. I’m too smart for that. No need to ask questions. I trust them,’” Best said.

And that trust between the fraudster and investor often is based on the idea that the fraudster’s extravagant lifestyle is proof that he or she is legitimate. “That is something that I have seen over and over and over again on this concept of trust,” Best said. “And I would say to you, if there’s something you take away from this, it is: Mr. Best said, ‘Trust but verify.’” Affi nity fraud is the type of fraud Best sees most. It is based on fraudsters using common bonds to build trust.

“It’s very prevalent in Utah but it is not limited to one particular group,” Best said. “The affi nity group can be across a number of different areas, and that’s important for me to say. I think that people think that it is tied to one area. It can be religion, it can be age, it can be national ethnicity, it can be from particular countries. They’re just trying to fi nd a common connection to you, your employees, your colleagues, and get you to trust them.”

The best ways to combat potential fraud is for the investor to ask lots of questions and be skeptical about the investment product being offered and who is asking for their money, and to check out several resources before investing.

One resource is Broker- Check, which can help investors research the professional backgrounds of current and former FINRA-registered brokerage fi rms and brokers, as well as investment advisor fi rms and reps. Others are the Investment Adviser Public Disclosure (IAPD) database and state regulator databases. The SEC’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) database can be used to research public companies.

“If someone is coming to you, your colleagues, your employees and suggesting that you invest or that they invest, you should be able to not only get information about the individual but you should be able to get information about the product,” Best said. “And if you can’t fi nd either one of those? Red fl ags. Something’s wrong. It doesn’t mean you don’t invest, but you still need to verify.”

Other red fl ags are an investment that sounds too good to be true, an intense pressure to invest immediately, and a lack of documentation about the investment, he said.

People often put their money into investments they don’t understand, and Best insisted that is a mistake. “If it doesn’t make sense to you, don’t invest in it. It doesn’t matter how lucrative the return is, you should understand what you’re investing in,” he said.

Fraud can take many forms. Best noted examples in which a man offered a 300-percent return on futures investments but instead used the money to support his lifestyle. Another already had a $47 million sanction by the SEC but that didn’t keep him from enticing people to go into another scheme of $1.7 million. Another promised a 300-percent return by day-trading Apple stock. In many examples, new investors’ money was used to pay older investors. The harmful effects of investment fraud stretch beyond the victimized investors, Best cautioned.

“The SEC is a partner to you in business. … The problem is, when these fraudsters take money away from citizens, they’re also taking money away from legitimate companies, because they [the citizens] don’t have money to spend on legitimate companies or invest with legitimate companies,” he said. “So it impacts everybody.”