Bond investors can buy U.S. Treasury bonds directly from the government and other bonds from brokers. The Financial Industry Regulatory Authority offers free tools to help you research the backgrounds of brokers and sniff out possible scams.
Know the Scams
FINRA, the U.S. Treasury and the U.S. Securities and Exchange Commission list a number of warning signs that a bond pitch is a scam. According to the Treasury, an offer to rent or lease Treasury bonds is always suspect, because the U.S. Treasury has yet to discover a legitimate instance of this arrangement. Some scam artists use phony identification, especially Forms PD F 1832 and PD F 1071, which have value only if physically attached to the actual bonds. Investors should be skeptical if the seller can't produce the bonds or if the bonds are missing vital information, such as a valid Committee on Uniform Securities Identification Procedures identification number. Each issued bond receives a unique CUSIP number. The Treasury warns that CUSIP number 912810BU1 is fraudulent. Anyone can verify CUSIP numbers for free on the Fidelity ActiveQuote System (see Resources).
Know the Broker
FINRA advises investors to verify a broker is licensed to sell bonds and to confirm the facts with the regulator that issued the license. Some fraudulent brokers claim that securities are certified by an official body such as the U.S Embassy in London -- this is a warning sign and investors should always verify the information. Other signs that a broker might be fraudulent include selling unregistered bonds, offering to set up confusing strategies, acting in a pushy manner, guaranteeing unrealistically high interest rates and failing to produce a prospectus or other documentation.
Questions to Ask
The U.S. Treasury suggests investors protect themselves from scams by asking questions and demanding information. Investors should require proof of ownership from the seller and directly from the financial institution holding the securities. Advice should be verified even if the source, such as a lawyer or accountant, is trusted. Potential investors should check corporate bond serial numbers with the issuing corporation. The Treasury warns investors not to assume that organizations or people are who they purport to be.
Tools That Help
FINRA offers free tools (see Resources) to help detect scams involving bonds and other securities. Scam Meter steps users through a set of four questions regarding the nature and source of an investment opportunity and then raises any red flags that indicate a possible scam. FINRA BrokerCheck allows you to find information about brokers, investment advisers and representatives. Risk Meter is a set of 12 questions that helps investors identify whether they are especially vulnerable to investment fraud. Investors can report bond fraud to the SEC and FINRA.
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