Review Questions

1. What is the best advice an investor can follow to avoid investment fraud? (See page 11-1)

2. What is the difference between legitimate cold calling and a search for “quick hits”? (See pages 11-1 and 11-2)

3. What rules must legitimate cold callers follow? (See page 11-2)

4. How has the Internet been used for investment fraud? Why does it occur so easily? (See page 11-3)

5. How do fraudsters use the Internet to increase sales of small stocks with low trading volume? (See pages 11-3, 11-4, and 11-7)

6. List and briefly explain the five most common investment schemes and the “red flags” that might alert you to these dangerous frauds. (See pages 11-4, 11-5, and 11-6)

7. To avoid investment fraud, what three questions should an investor always ask? What sources can help you locate the answer? (See pages 11-6 and 11-7)

8. What four investment descriptors might alert you to a potentially fraudulent offering? (See page 11-7)

9. List six sources of company information that an investor should always consult prior to making an investment. (See pages 11-7 and 11-8)

10. Outline the steps you should take to solve an investment problem. (See page 11-9)

Just Do It!! Acting on What You Learned

Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”

Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.

1. To learn more about cold calling, read the SEC brochure Cold Calling Alert by calling the toll-free number (1-800-SEC-0330) or visiting http://www.sec.gov/investor/pubs/coldcall.htm on the SEC website.

2. To learn more about fraudulent cold calling, rent the movie Boiler Room released in 2000 by New Line Video. The film explores the operation of a “boiler room” as well as some of the ethical questions surrounding such an operation. Viewers are warned that foul language is commonly used in this film.

3. To learn more about Internet investment fraud, visit the SEC website at www.sec.gov/consumer/cyberfr.htm or request the brochures Internet Fraud, Ask Questions, Microcap Stock, or Form for Taking Notes by calling the toll-free number (1-800-SEC-0330).

4. To learn more about scams and suspicious stocks, visit www.thestockdetective.com.

5. Find out before you need to know. Check your telephone directory or state website to identify the name of the office, department, or agency that functions as your state securities regulator. Or, visit the North American Securities Administrators Association at the Internet site www.nasaa.org or by calling 202-737-0900 to identify your state securities regulator. Note the address and phone number so you have it available, should you ever need it.

6. To learn more about the kinds of information retained by the Central Registration Depository (CRD), a database of brokers, investment advisors, and their firms, do the following. Inquire about your own broker, advisor, or their firm with the state securities regulator or the National Association of Securities Dealers Regulation, Inc. (NASDR), available by phone or on the Internet as explained in this unit. Such an inquiry does not reflect badly on the advisor in question, but will give you first-hand experience with the system and the kinds of information on record.

7. Review and visit the list of websites noted at the end of Unit 11 to expand your knowledge and awareness of investment fraud schemes.