Your Money: Tips for avoiding investment scams

How easy it is to be taken in and then defrauded by someone you trust, especially when regulators are out of the picture. And no, it wasn't Ruth Madoff's interview on CBS's 60 Minutes Sunday that rang my bell about investment fraud. It was the story of Monroe Beachy, known as the "Amish Bernie Madoff," an alleged master of investment fraud.

From 1990 to 2010, Beachy, 77, of Sugarcreek, Ohio, and Amish himself, raised an estimated $33 million from 2,600 investors, many of them members of the Amish and Mennonite sects. According to federal prosecutors, Beachy assured investors their money was safe, but instead invested in risky stocks, mutual funds, and junk bonds, and lost $16.8 million. While losses mounted in his fund, A&M Investments, authorities say, Beachy kept mailing clients phony statements that showed profits.

Prosecutors allege Beachy set up a Ponzi scheme much smaller than Madoff's but similar in the fraudulent way it was managed. Madoff cheated his investors of nearly $20 billion, the largest investment swindle in U.S. history.

"These representations were false and made to lead investors to believe they were earning interest and had an account balance that was over-inflated, compared to actual assets," according to the Beachy indictment filed Sept. 14 by Steven M. Dettelbach, the U.S. attorney for the Northern District of Ohio.

Beachy's religious clients, guarded about their privacy, wanted to settle the matter outside the court system.

Investors can avoid being scammed if they insist on independent financial statements and a third-party custodian.

Here are a few things to consider if you are ever approached about investing with a financial adviser.

A good place to start reading about these "affinity frauds," in which criminals prey on people they know, is an investor advocacy website: http://investor.gov/sites/default.

Then, be wary of sweet-sounding promises. Many of them are the tried-and-true tactics of a fraud. They include:

Phantom Riches - The dangling of the prospect of wealth, enticing you with something you want but can't have. You might hear: "These gas wells are guaranteed to produce $6,800 a month in income." If it sounds too good to be true, it likely is.

Source Credibility - Trying to impress you by claiming to be with a reputable firm or to have a special credential or experience. You might hear: "Believe me, as a senior vice president of the XYZ firm, I would never sell an investment that doesn't produce." Think: Lehman Bros.