One of the biggest fraudsters in U.S. history is Bernie Madoff who ripped-off investors by about $65 billion. He was caught in December 2008 and was eventually sentenced to 150 years in prison. He defrauded investors by taking on new investors, promising them high returns, and paying off old investors with the new loot raised from the new investors. This is known as a "Ponzi" scheme and eventually, the whole things falls apart because at some point, investors want their money back quickly before the fraudster can raise money from new investors. (See Business Insider Article on Bernie Madoff).
Here is a list of red flags that the Securities & Exchange Commission says should make investors suspicious of an investment offer:
1) It Sounds Too Good To Be True. Mom was right! Compare promised returns or interest rates with returns on a well-known stock index such as The Dow Jones Industrial Average and a bond benchmark such as U.S. Savings Bonds. Investing in the stock market, statistics show, has earned investors a yearly average of about 11.53% profit from 1928 to 2014 . Although the average profit in the stock market varies from year-to-year, any investment that promises you higher returns than the recent returns of the stock market is probably too risky for the average Teenvestor. Risk is not necessarily a bad thing, because with more risk there is the potential that you can make more money. However,you should know how risky something is before investing in it.
2) An Unusually High "Guaranteed Return." Most fraudsters spend a lot of time trying to convince investors that their investments offer extremely high returns, which are "guaranteed." If a person or a company that is not well known tells you that an unusually high return is "guaranteed," watch out!! Even if you know the company, if your guaranteed profit sounds too high, you may not be aware of all the risk involved.
3) A Company That Is Not Well Known. If you've never heard of a company, broker, or adviser, spend some time checking them out before you make your investment. Most public companies make electronic filings with the Securities and Exchange Commission, or (www.sec.gov), and computer databases exist to help you research brokers and advisers.Your state securities regulator may have additional information. Incidentally, if a supposedly upright financial firm lists only a post office box as an address, you'll want to do a lot of work before sending it your money. And if anyone mentions the words penny stocks—stocks that trade for less than $1— run away as fast as you can. These are stocks Teenvestors should avoid like the plague.
4) Being Pressured To Invest "Right Now." Scam artists usually try to create a sense of urgency, making you think that if you don't act now, you'll miss out on a fabulous opportunity. But savvy Teenvestors take time to do their homework before investing. If you're being pressured to invest, especially if it is a "once-in-a-lifetime," "too-good-to-be-true" opportunity that you "just can't miss," just say no and check with independent investment professionals first. Your bank account will thank you.
5) An Investment That Is Hard To Understand. Con artists frequently use a lot of big words and technical-sounding phrases to impress you. But have faith in yourself! If you don't understand an investment, don't buy it. If a salesman isn't able to explain a concept clearly enough for you to understand, it isn't your fault. Don't make it your problem by investing in the product. Lest you think that fraud only happens to beginning or inexperienced investors, Wall Street experts have also been victims, as evidenced by the Bernie Madoff fraud and other prominent scams the produced the WorldCom and Enron bankruptcies -- two prominent bankruptcies underscored by fraud.