It can be extemely difficult to detect fraud or a manipulative scheme, but when you are researching a company, watch out for these red flags.
SEC Trading Suspensions: The SEC has the power to suspend trading in any stock for up to 10 days when it believes that information about the company is inaccurate or
unreliable. Think twice before investing in a company that's been the subject of an SEC trading suspension. You'll find information about trading suspensions on the SEC's website.
Company Recommended: But No Current Information Be especially careful if you receive an unsolicited fax or e-mail about a company -- or see it praised on an Internet bulletin
board -- but can find no current financial information about the company from other independent sources. Many fraudsters use e-mail, faxes and Internet postings to tout thinly traded stocks, in
the hopes that the resulting buying frenzy will push the share price up so that they can sell their shares. Once they dump their stock and quit promoting the company, the share price quickly
falls.
High Pressure Sales Tactics: Beware of salespeople who pressure you to buy before you have a chance to think about and investigate the "opportunity." Dishonest people may try
to tell you about a "once-in-a-lifetime" opportunity or one that's based on "inside" or "confidential" information. Don't fall for a promise of spectacular profits or "guaranteed" returns.
These are the hallmarks of fraud. If the deal sounds too good to be true, then it probably is.
Assets Are Large But Revenues Are Small: Companies will sometimes assign high values on their financial statements to assets that have nothing to do with their business. Find
out whether there's a valid explanation for low revenues, especially when the company claims to have large assets.
Odd Items in the Footnotes to the Financial Statements: Many fraud schemes involve unusual transactions among individuals connected to the company. These can be unusual loans
or the exchange of questionable assets for company stock that may be discussed in the footnotes.
Unusual Auditing Issues: Be wary when a company's auditors have refused to certify the company's financial statements or if they've stated that the company may not have enough
money to continue operating. Also question any change of accountants.
Insiders Own Large Amounts of the Stock: In many fraud cases - especially "pump and dump" schemes - the company's officers and promoters own significant amounts of the stock.
When one person or group controls most of the stock, they can more easily manipulate the stock's price at your expense. You can ask your broker or the company whether one person or group
controls most of the company's stock, but if the company is the subject of a scam, you may not get an honest answer.
Additional Warning Signs
Don't deal with anyone who refuses to provide you with written information about the investments they're promoting. Never tell a cold caller your social security number or numbers for your
banking and securities accounts. And be extra wary if someone you don't know and trust recommends foreign or "off-shore" investments.