Investment Consult

Is it a scam? Tips for the wary investor

Our expert has seen his share of schemes over the years. Here's how you can protect yourself.

Lewis J. Altfest, PhD, CFA, CFP

Investment scam artists, unfortunately, seem to have little trouble finding new victims; many of them are doctors.

Take the case of a family physician, now our client, who lost $60,000 in a partnership that purchased an apartment house in the Bronx, NY. The CPA who served as the partnership's general manager touted the investment as a "great deal"—until investors anted up. Then he reported that the building was in the red, and that to hold costs down he had put himself in charge of collecting rents and keeping the books.

After painting that bleak picture, the CPA offered to buy out the limited partners' stakes, for about 25 cents on the dollar. Without asking to see the books or anything else that would shed light on the situation, the FP and several other investors bit, fearing that if they didn't, they'd lose everything. The whole scenario played out while the real estate market was taking a strong upturn.

Now, you decide whether that building really was operating at a loss.

Another client, a business executive, couldn't say No to anyone. That meant we were forever trying to keep him from saying Yes to inappropriate investments, including a kiwi fruit farm "tax shelter." After we'd saved him from that one, he informed us—too late, it turned out—about a scam that involved call options on the S&P 500. Simply put, an unscrupulous broker told him that he'd make money as the S&P rose and lose money as it declined. As a "hook," the broker promised to get the executive out of the deal if the market started to decline. Of course, no investment adviser has a crystal ball, but the executive believed that this guy did.

You can probably guess the rest: The market began to sink. The broker, not wanting to lose a client, convinced the executive to hang in. A few weeks later, the options were worthless.

The businessman's loss was small in comparison to the $1 million that an elderly woman forfeited on a private partnership that claimed to deal in health care receivables. Problem was, the partnership didn't have any receivables in its possession, but that didn't stop its directors from taking millions of investment dollars. The law eventually caught up with the swindlers, but the investors never recovered their money.

You can avoid falling victim to a scam artist by evaluating each opportunity with the following pointers in mind:

• Never invest in something you don't understand. Most legitimate investments can be explained in a few sentences.

• Always check out the person or group in charge. Don't deal with people over the phone unless you get a strong recommendation from your CPA, financial planner, or other person qualified to evaluate the investment.

• If the return you're promised sounds too good to be true, it probably is. A Long Island businessman offered my clients and me an opportunity to earn 24 percent a year on residential mortgages. I asked him why any homeowner would pay that much when banks were offering far lower mortgage rates. It turned out the loans would go to people with poor credit—those who had filed for bankruptcy, for instance. Moreover, I discovered that in the likely event of default, my clients and I would be responsible for evicting the homeowners and repossessing the properties.

• Ask a lot of questions, including at least one softball to see if you get a straight answer. I once asked someone who managed oil partnerships if he allocated oil profits from a good-performing partnership to a poor-performing one. He said he did, even though this is against the law if it's not fully disclosed to investors. I also found out that he had a personal stake in oil. So what was to stop him from offsetting losses on his stake with other people's money?

• Do some checking before you let anyone manage your finances. To find someone you can rely on, contact the National Association of Personal Financial Advisors (800-366-2732; www.napfa.org), or see "The 150 best financial advisers for doctors" in the Aug. 7, 2000, issue of Medical Economics.

Few investment scams have happy endings, but here's one that did: A New York City investment adviser who guaranteed clients stock returns of at least 30 percent used their money to purchase rare art for his apartment. It was a Ponzi scheme—early investors were paid with money put up by later ones, to lure more people into the swindle. Ultimately, the scam was discovered, the investment partnership was put into receivership, and the art confiscated. By the time the art was sold off, it had appreciated significantly—enough, as I recall, to allow all of the adviser's clients to recover their original investments.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. ( www.altfest.com ), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

Lewis Altfest. Investment Consult: Is it a scam? Tips for the wary investor.

Medical Economics

2002;12:18.