Here's a question for you: Who's more apt to become an investment-fraud victim? (1) A widow with no investing experience who had always relied on her husband to manage household money matters. (2) A well-educated, retired businessman who manages his own portfolio and knows finance.

Sounds like a no-brainer. The naive widow, right? Wrong, according to a study released in July 2006 by the National Association of Securities Dealers Investor Education Foundation.

Researchers analyzed more than 600 audiotapes of scammers delivering pitches to undercover investigators they thought were consumers--a collection that one researcher said was "like finding the con man's playbook." They also surveyed both victims and nonvictims to discover how the two groups differ. The result: a profile of people most vulnerable to investment scams (see Swindlers) and the techniques scammers use to snare even the most experienced and knowledgeable.

"We see plenty of fraud victims who are sophisticated, intelligent people confident in making on-the-spot investment decisions," says John Nester, a Securities and Exchange Commission spokesman. But don't think that you are immune if you aren't financially sophisticated. Researchers found that the less experienced are prey to other types of schemes, particularly phony lotteries, for example.

The study, which was conducted with WISE Senior Services, a Los Angeles social-services agency, and the AARP Foundation, found that scammers use a variety of tactics to lull prospects into a psychological state that alters their ability to identify and resist persuasion. Con artists flatter, cajole, berate, and browbeat prospects. "My pitch put the victim in a haze of ether," said one of them.

Your best defense against the haze? "Become familiar with persuasion tactics so that you can defend yourself against them before your judgment is clouded," says Elisse Walter, senior executive vice president at the NASD. Here's what else you need to know:


Fraud's best prospects

It's probably no surprise that older folks account for a disproportionate share of victims. People age 60 and older make up 15 percent of the U.S. population but account for about 30 percent of fraud victims. The reason: Crooks go where the money is, and seniors are most likely to have saved some. With baby boomers turning 60 at the rate of 330 an hour this year alone, scammers are likely to enjoy a boom of their own.

Baby boomers may also be vulnerable because unlike previous generations, they are more apt to manage their own retirement savings through 401(k)s and other self-directed plans rather than rely on pension-fund trustees. Paradoxically, their investment experience increases their victim potential. NASD researchers were surprised to discover that investment-fraud victims scored significantly higher on financial literacy tests than nonvictims, correctly answering nearly 58 percent of test questions vs. only 41 percent for nonvictims.

Why are the financially savvy more likely to be cheated? Before a con artist can sell a consumer on the merits of a bogus limited partnership, he must first make his mark feel relaxed about investing. "If you're someone who's already comfortable with investing, that first hurdle is removed and you're more likely to buy into whatever the crook is selling," says Nester.

Some con artists focus on people who have recently experienced health problems, job losses, or other setbacks. "People who have had rotten luck often feel life owes them something good," explains Donald Langevoort, a professor specializing in securities law at Georgetown University Law Center. "They are more willing to believe this is going to be the one case where something that sounds too good to be true is actually legitimate."

Con artists often start a conversation with questions that lead to a "yes" answer. Example: "Are you interested in increasing the value of your retirement savings?" A positive response allows the scammers to ask more-probing questions, say, "Can we both agree that anyone like you, who knows a lot about investing, would not want to pass up an opportunity like this?" Such talk helps them size up a target and stroke his or her ego, says Langevoort.

With a little knowledge about you, con artists can choose from a number of ploys. Among the most common:

The phantom fixation. In this classic pitch, a salesman dangles the prospect of instant wealth and high returns that come with little or no risk. In the "prime bank" scheme, which has been widespread in recent years, he claims to have access to bank instruments normally reserved for top Wall Street financiers. Supposedly, investors' money will be used to buy and trade "prime bank" financial instruments on clandestine overseas markets, generating guaranteed profits of 100 percent or more. No such financial instruments exist, of course, and investors simply kiss their money goodbye.

Other offers promising eye-popping or "guaranteed" returns include certificates of deposit, bonds, or promissory notes that supposedly pay above-market rates, and bogus charitable-gift annuities, which pay an income to the investor while providing funds to a charitable organization. The charity turns out to be a sham, and the investor never receives any income.

Social consensus. The appeal of this pitch is simple: "Everybody's doing it." Social consensus is often used in affinity frauds, scams targeting members of a specific group. The con artists may be group members or enlist respected leaders to persuade others to invest.

When people hear that their friends and acquaintances have invested in a plan, they want to follow along. Just because you know somebody, however, doesn't mean that he's onto a good deal. "Putting money into something just because your brother-in-law or someone in your church says it's OK is like sending your 13-year-old daughter out on a date with someone 15 years her senior simply because he lives down the block," says Ruth Hayden, a financial consultant in St. Paul, Minn.

In one typical affinity fraud, a church elder in Kenosha, Wis., collected about $6 million from 117 parishioners by promising a 15 percent return from a real-estate venture. Instead, he used money from new investors to pay interest to earlier ones and donated what was left over to the church. Church members lost everything they'd invested. Two investors later committed suicide. The elder pleaded guilty to three felony counts of mail fraud and began serving a 10-year prison sentence in 2003.

"Being taken in by someone you trust because they're a member of your church, business or social club, or book group is one of the top forms of fraud year after year," says Patricia Struck, past president of the North American Securities Administrators Association. "Investors may be told to put their trust in God and not ask too many questions, but you always need to understand how an investment works and check the background of the person selling it.

Scarcity. Making the product offered seem rare or in great demand is another technique that fires up targets. Typically, victims are told that if they don't act immediately, they'll miss out.

A pitch captured on one of the undercover audiotapes clearly illustrates this method. The con man contends that the coin he is trying to sell his intended victim is extremely valuable, explaining that "22,675 coins were minted, and only 4 have survived!"

You can spot scarcity pitches on TV home-shopping shows. Though the shows are legitimate--buyers do receive the products they pay for, after all--their techniques are similar to those of scammers. A friendly TV saleswoman describes the virtues of the bracelet she's hawking while on the bottom right of the screen, a clock counts down the amount of time left and a counter on the lower left tallies how many people are calling in to buy. To up the ante, the saleswoman takes an on-air phone call from someone who gushes about the bracelet's fine points.

Reciprocity. Scammers may position themselves as your friend and do small favors to pressure you to reciprocate by investing. One saleswoman on audiotape is heard telling her target that she bought a coin worth $4,650 at an estate sale for only $3,100, and she will sell it to her prospect at that bargain price, plaintively proclaiming that she's not even taking a commission for herself.

Sometimes scammers act as if they're young and helpless to make the victim feel like a parent who is obligated to help by investing. Or they may take on the role of an authority figure who knows what's best. As one man on the audiotapes said: "If you don't want to make up your mind right now, that's where I come in. I will make up your mind for you."


Answer no questions

Researchers found that con artists selling big-ticket investments take their time bagging their prey. They may call or meet repeatedly and carry on lengthy conversations, asking questions about their prospects' lives to find out what will make them cough up the money. After one salesman determined that his target was very religious, for example, he spent the first 15 minutes of every call praying with her. "She never made a decision on her own," the scammer said. "It was always God's choice."

Clearly, retaining your ability to make up your own mind and defending yourself against fraud depends on asking--rather than answering--lots of questions.