Investor Fraud Study Reveals Why Investors Are Susceptible

study has examined why some investors, particularly the elderly, are more susceptible to investment fraud than others. The study, conducted by the NASD Investor Education Foundation, WISE Senior Services and AARP Foundation, also exposes the various tactics used by con artists and offers strategies to avoid becoming a victim. For data, researchers for the project analyzed undercover tapes of fraud pitches. They then asked questions of victims and non-victims to determine how they differ.

In announcing the study, the NASD Investor Education Foundation said that the research results "dispel common myths about who's actually being targeted and offer effective strategies on how seniors can avoid these costly financial traps." Let's overview those research results and effective strategies.

The key research results include, first, that investment fraud victims are more, not less, financially literate than non-victims. This finding was a surprise, given that the researchers had assumed the opposite as a "major hypothesis", and called into question the efficacy of financial literacy programs to safeguard against investment fraud.

Second, the research found that investment fraud criminals use a wide variety of different influence tactics (from friendship to fear to intimidation tactics) to defraud the victim. The most common tactics were "source credibility" (claiming to be from a known legitimate business), "phantom fixation" (dangling the prospect with wealth and riches) and "social consensus" (showing examples of others who had invested).

The third key research result was that fraud pitches are tailored to match the psychological needs of the victim. For example, the researchers discovered that con artists used very different pitches for widows than they did for knowledgeable, self-reliant males.

Fourth, investment victims were found to be demographically quite different than non-victims. Among the differences are that victims tend to be male, living with someone (less alone), married, better educated and earning higher levels of income.

The fifth key research result was that investment fraud victims are more likely to listen to sales pitches. Willingness included a tendency to listen to pitches by a stranger on the phone or from a stranger through the mail, as well as to attend a "free seminar" on investing.

Sixth, investment fraud victims are more likely than non-victims to rely on their own experience and knowledge when making investment decisions. Instead of seeking and relying upon independent, qualified advice, victims tended to have a personality that was "very self-reliant and self deterministic."

Seventh, the research found that investment fraud victims have experienced more difficulties from negative life events than non-victims. Such events include illness and financial trouble, as well as the stress resulting from those events.

Eighth, investment fraud victims nevertheless are more optimistic about the future. A skilled con artist can exploit this kind of "wishful thinking" mentality.

Finally, investment fraud victims dramatically under-report fraud.

Based upon these research findings, the report concludes that it is insufficient merely to teach investors the basics of investing. The report recommends that investors must be educated as to how persuasion tactics work. Further, seniors and others must be encouraged to report crimes to securities regulators.

Investors can access an executive summary of the research report as well as an audio file of real-life fraud pitches by visiting www.nasdfoundation.org. It's worth the effort!

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.