Investment fraud accounts for $40 billion in investor losses per year, according to the association of state securities regulators called the North American Securities Administrators Association (NASAA). Con artists take advantage of fear as well as greed, and fear of running out of money is prevalent these days.
NASAA recently released its 2011 Top Investor Traps and Threats which can be viewed on its website located at www.nasaa.org.
Regulators point out that real estate investment offerings are rising and can be dangerous. Aside from the ever-present risk of fraud and outright theft (buying from a seller who doesn’t own what he’s selling), real estate investments are complicated and risky. Investments involving distressed real estate involve properties that may be in foreclosure, or bank-owned or pending a short sale (i.e., for less than is owed on the loan). The properties themselves my have hidden defects and problems. The sales pitch is that the investor can buy it for a song and simply “flip it” for a quick profit. But that is what the seller is trying to do. Sales are slow. The likelihood that the investment can be flipped is low. Investors may be in for a long, costly holding period.
Regulators say that precious metals are another popular scam. Promoters may seek investors’ money supposedly to reopen mines and buy equipment. Despite representations and pictures by the promoter purportedly showing that there actually is a mine and that the money will be used to buy equipment, it is often a complete fraud.
Regulators also warn investors to beware of investments in gold, gold coins, and other precious metals. Gold prices may be going higher but they could just as easily collapse, as the price run up has been huge. Gold has no intrinsic value or internal rate of return. It does not pay interest. It is only worth what the market is willing to pay for it at any given time.
Regulators further warn investors to take claims of “the next big thing” with a grain of salt. They remind us of the tech bubble that collapsed despite claims of a “new paradigm” of valuing dot.com companies. In the investment world, things are never “different this time.”
Regulators say that energy investments are popular scams. Even if they are not total frauds (and they may be), these investments are high-risk, illiquid private placements that may not have been investigated thoroughly by the seller, or, if they have been investigated, the seller, wanting to make a sale, may not disclose facts that would make a reasonable investor say no (the fact that the seller is legal obligated to disclose and not misrepresent material facts does not mean that truthful and complete disclosures will be made). Loss of the entire investment is not uncommon with these investments.
To protect yourself, regulators advise investors to investigate the background of promoters and the legitimacy of proposed investments. Make an honest assessment of how much of a loss you could stomach or afford ? this has to do with how soon you may need the money and what percentage of your overall investable assets would be involved. Money that you may need to spend in 3 to 5 years should not be put exposed to any risk. Nor should a significant percentage of your investable assets be put in a high-risk, speculative investment.
Be suspicious of “proprietary” or secret programs, systems and strategies. They are red flags of fraud.
Get a second opinion from a CPA or attorney who specializes in investment fraud. Fraud by its nature is subtle and difficult to detect. The best con artists would not strike you as con artists. The money you spend to avoid a scam could be worth its weight in gold.
Page Perry is an Atlanta-based law firm with over 150 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 45 occasions. For further information, please contact us.