Financial advisors, as well as investors, can fall victim to scams that cost investors millions of dollars, said Alan Rosca, an attorney with Conshohocken, Pa.-based Goldman Scarlato & Penny who specializes in representing victimized investors.

Like individuals who are lured into investing money when proposals are made by people they trust, advisors may “lower their guard” when another professional recommends an investment, Rosca said in a recent interview.

Again, like investors, advisors need to make sure they do their due diligence before making a recommendation to a client, even when the investment is proposed by a trusted colleague, CPA or attorney who the advisor has worked with in the past, Rosca said. In these cases, he noted, an advisor might “apply less scrutiny than he or she might otherwise apply while vetting the new investment product. Even advisors can fall victim to scammers.”

The Securities and Exchange Commission often charges advisors with duping clients in various ways in order to gain access to their funds. Sometimes these civil charges are accompanied by criminal charges. But sometimes an advisor is inadvertently caught up in a scammer’s proposal, Rosca said.

It all boils down to an advisor doing his or her due diligence and looking for red flags, Rosca said.

Recently the SEC charged three men in Maryland with cheating investors out of $27 million by relying on the relationships built up by immigrants, church groups and health care workers. Familiarity builds confidence and makes investors more vulnerable. The same can happen to an advisor if a product is recommended by a CPA or an attorney, Rosca explained.

“In my experience as a securities lawyer, and in my research as a securities regulation adjunct professor, once a fraudulent scheme reaches the $10 million to $15 million size, the schemers usually need the support of what I call professional infrastructure—lawyers, accountants and bankers, who are supposed to act as gatekeepers and deny those scammers access to crucial professional assistance,” said Rosca, who works at his firm's Cleveland office.

Advisors “could end up enabling fraudsters and helping victimize the innocent investors, who see the presence of such professionals as an endorsement of the legality of the scheme,” he added.

Advisors need to check the backgrounds of people proposing any product, and investing in startup companies is particularly risky. “The chance of a startup becoming the next Facebook or Google is not good," Rosca said. "If it really would be a possibility, the seller would be working with a Goldman Sachs, not a small advisor.

“Scammers tend to be quite sophisticated and they take advantage of the newest trends and products," he added. "Advisors need to stay ahead of the curve.”