In today’s low-interest-rate environment and with investors rightly suspicious of stock and bond investments, investment scams are flourishing. Investors should pay attention to the warnings of state securities regulators, whose list of Top 10 Investor Traps is featured on CNBC.com’s American Greed.
How do you avoid being victimized? Denise Voight Crawford, Texas Securities Commissioner and president of the organization of state securities regulators known as the North American Securities Administrator Association (NASAA), says, “The way to protect yourself from affinity fraud is to investigate before you invest.” First, find your state securities regulator on NASAA.org, and ask them for information regarding the investment and the person who asked you to invest. Conspicuous red flags for fraud include being promised a high rate or consistent rate of return on securities that aren’t registered in your state by a person who is not properly licensed.
In addition, be very skeptical about investments that NASAA has identified as Top Investor Traps, including:
Leveraged Exchange-Traded Funds (ETFs). These funds use exotic financial instruments, including options and other derivatives, and promise the potential to provide greater than market returns as the value of the underlying assets rise or fall. Given their volatility, these funds typically are not suitable for most investors.
Private Placement Offerings. Private placements are unregistered investment contracts. Being unregistered, they are not subject to any screening by securities regulators. They provide an attractive option for con artists, as well as individuals barred from the securities industry and others bent on stealing money from investors through false and misleading representations. State securities regulators have observed a steady and significant rise in the number of private placement offerings that are later discovered to be fraudulent, especially those made under a federal registration exemption (Regulation D, Rule 506).
Entertainment Investments. They constitute a particular type of unregistered investments. They include investments in movies, infomercials, internet gambling and pornography sites. They promise high returns while offering little disclosure of risk.
Ponzi Schemes. Despite the infamous Madoff multi-billion dollar fraud and 150-year prison sentence, these scams continue to trap investors. High payments are made to the early investors. But the payments are not true returns on investments; they are actually the funds of later investors, who end up losing all or most of their money to the promoter. Here again, beware of investment opportunities promising high and steady rates of return. Ponzi schemes have been described as a house-of-cards swindle, and “the securities world’s equivalent of a purse snatch.”
Short-term Commercial Promissory Notes. NASAA says that many seniors have lost their life savings by investing in short-term commercial promissory notes that are nine months or less in duration. These notes are touted as “insured” or “guaranteed,” but they are not. The insurance companies are usually offshore companies that are not licensed to do business in the United States, and lack the resources necessary to make good on guarantees. These risky notes pushed on the public by a sales force paid with extremely high commissions.
Gold Bullion and Currency Scams. The high price of gold provides excellent cover for gold bullion scams in which the seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor as it gains in value. In many instances the gold does not exist. Foreign exchange (forex) trading schemes are often similarly bogus. Promoters profit by charging high commissions or selling investment strategies, but in many instances there are no trades; the money is simply stolen. Even if the promoter is not a crook, trading in foreign currencies requires resources far beyond the capacity of most investors.
Life Settlements. State securities regulators long have been concerned about life settlements, or viaticals, and the rising popularity of these products among investors has prompted a recent congressional investigation. While life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits come at a high price for investors, particularly senior citizens. Wide-ranging fraudulent practices in the life settlement market include Ponzi schemes; fraudulent life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk.
Natural Resource Investments. NASAA expects to continue to see a rise in energy and precious metals scams promising quick, high returns. Scams may include oil and gas schemes, as well as fraudulent offerings of investments tied to natural gas, wind and solar energy, and the development of new energy-efficient technologies.
Real Estate Investment Schemes. Scams disguised as offers to help homeowners “save” their homes or “fix” their mortgages are on the rise. They usually involve a fee paid in advance. Seniors may be attracted to reverse mortgages, which may be a legitimate lending option. However, the resulting lump sum home equity payment makes them an attractive target for unscrupulous salesmen, who may attempt to direct these funds toward worthless or unsuitable investment products.
Speculative Inventions and New Products. New products are for experienced venture capitalists who know how to assess the risks and, most importantly, can afford to lose every penny invested. That excludes most of us. Because of their high risk, they are terrible investments for your retirement money even though they may promise high returns.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions. Page Perry’s attorneys are actively involved in representing investors who have lost money in investment scams. For further information, please contact us.