Experts Give Tips on Avoiding Futures Scams

Shady practices and scams involving commodity futures are all too common, as the FBI’s investigation of questionable practices on the Chicago Board of Trade and Chicago Mercantile Exchange illustrate. The following tips can help you avoid being taken in by commodities frauds:

- Be extremely wary of any pitches made by strangers over the phone. Deb Deutsch, associate director of the National Futures Assn., says many phone pitch artists use hard-sell tactics, such as telling you that you must get into an investment now before it’s too late. But more and more salespeople are using soft-sell approaches, first asking about your family and calling back later to make pitches, said Irving Einhorn, regional administrator in Los Angeles for the Securities and Exchange Commission.

Either way, if it sounds too good to be true, it probably is.

- Ask questions. The North American Securities Administrators Assn. suggests the following questions: How long has the company been in business and who are its principals and officers? What percent of the initial investment will be allocated to commissions, fees and other costs? Where will these investment funds be held? What independent references can be obtained from people who have dealt with the firm or know it?

- Don’t be snookered by sales literature. Many “boiler room” operations provide slick brochures, often making misleading claims.

- Check to see whether the company you are dealing with is registered with a reputable regulatory agency, such as the Commodity Futures Trading Commission or the SEC, or with a reputable industry group, such as the National Futures Assn.

- Educate yourself. The National Futures Assn. offers a free brochure, “Investor Swindles: How They Work and How to Avoid Them.” It contains 16 questions you can ask to turn off a swindler. Get it by calling the association at 800-621-3570.

Unfortunately, avoiding the type of trading-floor abuses alleged in the FBI’s inquiry may be harder. One such abuse involves brokers who misrepresent the price at which your trade was executed, so that the broker can skim part of your profit for himself.

If you suspect that you may have been cheated like this, ask your broker to give you the exact time your trade was executed and on what exchange. Each futures exchange is required to keep records of all trades and what time they occurred.