How to spot an investment scam

Here is a link to the transcript and podcast of an interview with Jonathan Phelan, Head of the FSA's Enforcement Division, on the Motley Fool site.

Much of the interview concerns share scams but Phelan's comments on cold calling are well worth noting and as well as ponzi schemes that promise you guaranteed profits.

Cold calls

'David:

So when somebody is contacted by a scamster, what are the things that they should be looking out for? -- what are the things they should be aware of?

Jonathan:

I think the first thing to be aware of is, why has this guy contacted me? People don't do that out of an abundance of benevolence, they contact you because they're trying to sell something, and sometimes you've got a legitimate salesman; in the investment world that we're concerned with at the Financial Services Authority, people shouldn't cold call, so you should have invited that call, so the first red flag for you is, where you get a call out of the blue from someone you didn't expect to call you, a legitimate broker or a legitimate advisor shouldn't be calling you out of the blue -- that's a red flag to start off with.'

Ponzi schemes
'David:
So, let's have a look at some of the typical scams, I mean one that will be, I think, at the forefront of a lot of people's minds is pyramid selling, particularly in the case of Bernard Madoff. Now, how do these pyramid schemes work? A lot of people have heard about them, but they say, "What exactly is a pyramid or a Ponzi scheme?"

Jonathan:
Well, they can work in different ways, I'll illustrate it with one fairly typical example, which might be that I know someone who says, "You're only getting one and a half percent saving interest in your bank, that's a bit rubbish, isn't it? Why don't you give it to me and give me £1,000, and at the end of the year I'll give you £1,500" It sounds fantastic, so you give him the money, and then he goes to someone else, or I tell my friends, and they give him £1,000.'

(Go to the transcript for the rest.)