10 Ways to Avoid Investing in Fraudulent, Scam and dishonest Companies

Whether we are an individual investor, fund manager, angel investor or venture capital, we will come across companies which look very lucrative and seems too good to miss the investment opportunity.

But looking at the history, many companies which appeared immensely attractive investments at some point in time turned out to be frauds, scams and dishonest. Enron’s $63 Billion accounting fraud, $64.8 billion Bernie Madoff’s Pyramid Scheme, Lehman Brothers, WorldCom etc. all were too good to be true at some point and another thing common about them is they aren’t there anymore.

Therefore, it is vital to carry out due diligence on any company before investing. I have listed some ways to identify possible fraudulent, scam and dishonest company, so we can avoid risking our money in them.

• Starting with basic company history, and compare it to recent operations. Have executives tried to cover up stagnation or no growth?

• What about the company’s auditor? Is the company’s auditor a small unknown audit firm?

• Listening to the trustworthy people who are betting against the company (short-sellers) and their opinions in the company of our interest.

• Look at recent acquisitions. Do they make sense? Why has the company bought them? If the company is creating a shell company, find out the reason, make sure the reason makes sense!

• If possible, go to their headquarters, and visit their local branch. Does everything add up? Mostly, start-ups

• What is the CEO of the company saying about the company in recent earning reports? Does it sound too good to be true? Have the past announcements and determinations met? Or was it pulled out of the thin air?

• Study the CEO’s past. Do they have a legitimate track record? Were they involved in frauds or scams? How well did they do in the previous company?

• Talk to company employees to and find out what’s really happening. They have nothing to lose compared to the management team and they may even spill something of the value which isn’t publicly talked about.

• Compare competitor metrics: Does the company have nonexistent metrics, similar size competitors? What about online reviews on their website or other customer’s review? Are many customers complaining about the same thing, if so, has the company tried to solve it. If not, it may lose significant costumer.

• Read the company’s balance sheet, cash flow,

and other accounts specifically. Does it reflect reality and can it survive the unpredictable shock? It shouldn’t be recession-proof but it surely should be able to handle tough times and not merely vanish. And does the target of the company make sense when we look at the market and the broader economy of the nation and Country?