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Beware of "Risk-Free" Investments

There's no such thing as a risk-free investment. ©istockphoto.com/ginosphotos

There's no such thing as a risk-free investment. If someone tries to sell you an investment they claim is risk free, you should walk away. If you don't, you could be exposing yourself to fraud. That's what happened to dozens of investors in Florida who bought into a $930 million Ponzi scheme.

For more than four years, Nevin Shapiro of Capitol Investments USA persuaded victims to invest in what they thought was a wholesale grocery distribution business. Shapiro promised his investors returns of up to 26 percent—far higher than returns investors would expect to earn in the stock market.

In reality, there was no grocery distribution business. Instead, investors were funding Shapiro's extravagant lifestyle. He used their money to make payments on a mansion in Miami Beach, a yacht, a luxury car and gambling debts as well as for expensive seats at sporting events. He collected more than $930 million before the scheme eventually collapsed. Federal prosecutors and the Securities and Exchange Commission (SEC) charged Shapiro with fraud, and he was sentenced to 20 years in federal prison.

How did Shapiro con these investors? He used a persuasion tactic known as "phantom riches"—playing on their desire to make money fast and risk-free. He showed the investors fake documents that highlighted the company's exaggerated profitability and projected growth to help support his claims. Shapiro also reassured investors by boasting about his own wealth and showing off his extravagant lifestyle.

Before you make any kind of financial investment, keep the following tips in mind to avoid becoming a victim of fraud:

• Remember, there's no such thing as a risk-free investment. All investments carry risk. When investing, you need to decide how much risk is appropriate for you.

• Don't fall for the "phantom riches" tactic. The best way to avoid getting caught up in the lure of phantom riches is to slow down the seller's pitch. Ask questions, and tell the seller you need time to think about the offer.

• Ask and check before investing. Make sure you check out the seller's background and see if the investment is registered before handing over any money.

For more resources on spotting investment fraud tactics, visit the FINRA Foundation's website www.SaveAndInvest.org/FraudCenter.

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