It's often hard to resist an investment tip from someone in your social circle. There's nothing wrong with getting investment ideas from friends and acquaintances, but you should do more research. Before handing over any money, you need to check out the investment and the person selling it.
This is a lesson that cost Carolyn and Ray Thompson of Brewer, Maine, $30,000.
Friends told them about a new and exciting green energy opportunity involving windmills small enough to install on rooftops. Their investment would get them exclusive territories where the Thompsons could lease windmills to homeowners and businesses.
It sounded like a good idea to the Thompsons, so they invested $30,000. They expected to receive shares in the windmill company, three territories where they could launch their business and three free windmills of their own. But after traveling to Las Vegas for the initial shareholder meeting in 2008, the Thompsons realized they had been scammed—there were no innovative new windmills. The Thompsons and about 200 other investors were shown a full-size windmill, still being set up in the middle of the Nevada desert.
"When I saw that windmill," said Carolyn Thompson, "I couldn't stop the tears from rolling down my cheeks. It was nothing like what they were telling us."
Cons regularly rely on word-of-mouth to bring in new victims. Or they make their pitches to groups, knowing that subtle social pressure brings in more money. Psychologists call it "social consensus," and it's the foundation of affinity fraud. The thinking goes that if everyone is doing it, it must be okay. But the problem is that no one looks behind the curtain to question the person working the levers.
In the Thompson's case, that man had a long history of alleged scams and was eventually indicted by a federal grand jury in Los Angeles. If they had checked his background, they may have avoided this loss.
"What we really feel bad about," said Ray Thompson, "is that we talked to other people and got them into it, too. They lost $10,000 each. My losses are my fault, but when I bring other people into it, I'm really sorry about that."
The Thompsons lost thousands to investment fraud, but you don't have to. Always check out the investment and the seller. Also, use these key strategies to resist sales pressure and help distinguish good investment offers from bad ones.
Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA).
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