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Investment Fraud Red Flags for Physicians


What doctors should look for when examining investment opportunities.

Investment fraud targeting doctors takes many forms. There are common recurring red flags that may alert you to an existing exposure or the need for additional due diligence on a deal you are considering.  Here are some key points to examine.

1. Who holds the money?

Ideally there is a reputable “third-party custodian” involved. This means that your money is the actual custody of a third party who maintains strict accounting and security of your funds. While a particular advisor may be authorized by you to manage the money and make recommendations as to where and how it should be invested, he or she can never actually withdraw it or take possession of it into an account they personally have access to. A simple example is the infamous Bernie Madoff, who did not use a third-party custodian and who could thus dip into the funds of his investor anytime he wished.

2. What’s my advisor’s record?

You can check up on your advisor at the FINRA (formerly SEC) website if they are a securities licensed advisor. This “broker check” will allow you to see the current status of their license, any recent disciplinary or financial issues, and a list of their “outside business activities” also referred to as an “OBA” report that should list any and all business activities they are engaged in outside the scope of their practice.

3. Investments outside the office

If you see an investment that you are being solicited to participate in by your advisor on the OBA report it may bear additional investigation as it is not covered by the scope of your formal relationship and perhaps more importantly the scope of the due diligence and control of their “Brokerdealer”, the securities firm they operate through that holds their license and which is part of the system of checks and balances in place to protect you. If the investment they are offering is some kind of private offering not covered by the formal client/advisor relationship and is not disclosed on their OBA report, be even more suspicious, as they may already be in violation of securities laws and may be intentionally concealing their activity. If they own a piece of the deal or are compensated in any way, directly of through a third party straw-man, assume that it should have been disclosed.

4. Watch out for anything “secret”

In some cases reasonable non-disclosure and non-circumvention agreements may be reasonable, as in cases where the nature of the technology or the business model is unique and should not, reasonably, be disclosed to third parties who are not part of your advisory team. Where these kinds of documents and agreements should raise a red flag is when they try to preclude your advisors completely and don’t want any other professionals to see what they are doing while they are doing it. You have a right in nearly every business context to have key advisors, attorneys, and CPAs in particular comment on and review things like PPM, offering memorandums, business plans, and financial projections. It is always advisable to do this with any private offering, even if it is something, “really special that only rich people know about” - a common come-on. Also, be wary if your advisor asks not to call or email at her office about the special outside investment. Both of those forms of communications may be monitored by their firm and its compliance department and such requests may indicate a desire to keep that communication from their view.

5. Know the true dollar amount you are risking

A commonly recurring issue is not understanding the total limits of what you have at risk. We’ve previously discussed issues related to real estate-related debt exposures and personal guarantee liability in particular. It’s always important to remember that most investments put the assets you are investing at risk, others may also carry additional liability in the form of capital calls, assuming additional debt, or other forms of onerous liability. This means that you might not only lose the amount you put in, but may have to make substantial additional contributions out of pocket, even if you know the business or deal won’t ever work.

This list is by no means complete and financial fraud can be exceptionally sophisticated. It does however provide some of the most basic issue to be aware of. Asset protection has many forms, being informed is a terrific form of defense.


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