Top 10 investing scams

By Kay Bell and Amy Fleitas • Bankrate.com

 

The stock market has picked up steam lately, but for many investors the resurgence isn't enough. Instead, they look for quicker ways to bolster their portfolios. The problem is, some promised high-return opportunities are downright frauds.

Ponzi scammers top the list of scam artists taking return-hungry investors to the cleaners, according to the latest look at the investment industry by the North American Securities Administrators Association. A close second -- investment fraudsters targeting seniors.
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"These schemes offer products and pitches that may sound tempting to many seniors who've seen their retirement accounts and income dwindle in recent years," says Ralph A. Lambiase, NASAA president and director of the Connecticut Division of Securities. "It pays to remember that if an investment opportunity sounds too good to be true, it usually is."


The quest for a safe investment vehicle is the common theme in all the scams. Here are this year's top 10, ranked roughly in order of prevalence or seriousness:

1. Ponzi schemes. This is an old scam named for Charles Ponzi, a swindler from the early 1900s who conned $10 million from investors by promising 40 percent returns. His scam has been copied by countless crooks. The formula is simple: Promise high returns to investors and use their money to pay previous investors.

According to the NASAA, Ponzi scammers often blame government intervention for the failure of their system. In Mississippi last year, two Ponzi scammers pled guilty to a scheme that bilked 41 investors from four states out of $10.2 million. They told investors they were taking part in a money-trading program. The program never existed.

2. Senior investment fraud. Record-low investment rates, rising health care costs and an increased life expectancy have set seniors up as targets for con artists peddling investment fraud -- like Ponzi scams, unregistered securities, promissory notes, charitable gift annuities and viatical settlements. Last year, Pennsylvania securities regulators shut down a Ponzi scheme that bilked $2 million from seniors' pensions and IRAs.

3. Promissory notes. These are short-term debt instruments often sold by independent insurance agents and issued by little-known or nonexistent companies. They typically promise high returns, upward of 15 percent monthly, with little or no risk.

4. Unscrupulous stockbrokers. As share prices tumble, some brokers cut corners or resort to outright fraud, say state securities regulators. And investors who have grown more cautious and scrutinized their brokerage statements have discovered their financial adviser has been bilking them via unexplained fees, unauthorized trades or other irregularities.

5. Affinity fraud. Taking advantage of the tendency of people to trust others with whom they share similarities, scammers use their victim's religious or ethnic identity to gain their trust and then steal their life savings. The techniques range from "gifting" programs at churches to foreign exchange scams.

6. Unlicensed individuals, such as independent insurance agents, selling securities. From Washington state to Florida, scam artists use high commissions to entice independent insurance agents into selling investments they may know little about. The person running the scam instructs the unlicensed sales force to promise high returns with little or no risk.
This is the third year this entry has been on the top-10 list.

Investors approached by an independent agent should first call the state's securities regulator and ask if the salesperson is licensed. Then ask whether the investment being offered is registered as well. If the answers are yes, the investors should be more comfortable about the product. But investors should review the product with the same healthy skepticism that they would any investment opportunity.

7. "Prime bank" schemes. Con artists promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. Purveyors of these schemes often target conspiracy theorists, promising access to the "secret" investments used by the Rothschilds or Saudi royalty. In an effort to warn investors, the Federal Reserve pointed out that these don't exist. But unfortunately, that government denouncement just feeds into the conspiracy mindset linked to this scam.

8. Internet fraud. According to NASAA, Internet fraud has become a booming business. In November, federal, state, local and foreign law-enforcement officials targeted Internet fraudsters during Operation Cyber Sweep. They identified more than 125,000 victims with estimated losses of more than $100 million and made 125 arrests.

"The Internet has made it simple for a con artist to reach millions of potential victims at minimal cost," says Lambiase. "Many of the online scams regulators see today are merely new versions of schemes that have been fleecing off-line investors for years."
Lambiase warns consumers to avoid the infamous Nigerian 419 scam, saying Internet users should ignore e-mails from individuals in need of help who want to deposit money in overseas bank accounts.

"Don't be dot-conned," he says. "If you get an e-mail pitching a deal that can't be beat, hit delete."

9. Mutual fund business practices. Recent mutual fund scandals have made the national news and attracted the attention of investors and launched several investigations.

"These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders," says Lambiase. "We will continue to actively pursue inquiries into mutual fund improprieties," he says.

10. Variable annuities. As sales of variable annuities have risen, so have complaints from investors -- most notably, the omission of disclosure about costly surrender charges and steep sales commissions. According to the NASAA, variable annuities are often pitched to seniors through investment seminars -- but regulators say these products are unsuitable for many retirees. Lambiase says variable annuities make sense only for consumers who can afford to have their investment locked up for 10 years or longer.

"Our fight against fraud never stops because each year con artists discover new ways to fleece the public," says Lambiase. "Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings as well."


Investment Tips

Keep the following points in mind before you invest:

• Obtain and review a written proposal or prospectus on the venture and the company, including financial statements.

• Consult an accountant, attorney or other knowledgeable person whom you trust.

• Contact the Illinois Secretary of State Securities Department to find out whether the company and the promoter have any history of problems with authorities.

• Beware of schemes in which recruitment of new members is more important than the product being sold. Those in the scheme early may profit: those in late always lose.


Whenever in doubt, wait until you can consult all available resources.

• Never send cash through the mail or give it to a messenger sent by the salesperson, and never give a credit card number over the phone.

• Keep all correspondence and take notes of all conversations regarding an investment.

• Do not be pressured into buying by "tomorrow will be too late" tactics. No legitimate broker will rush you into an investment. High pressure is a good indicator of fraudulent operations.

• Beware of testimonials. Fraudulent companies sometimes hire people to claim that the firm's investments brought them wealth. Other con artists exploit the trust that members of churches and fraternal organizations have for one another: When one member of a group invests, the promoter uses that person as an unwitting accomplice by citing his or her investment to convince other group members to invest also

• If in doubt, do not invest. It is better to be safe than sorry. Also, if you become suspicious, get out of the investment. Stop payment on your check or demand your money back.

• If, after careful consideration, you decide to invest, keep your initial investment small. Pressure to put all your savings into a single investment is a sign of a scam. Most reputable stockbrokers believe that diversification is a wise safeguard. Also, never invest more than you can afford to lose.

• In general, if the deal sounds "to good to be true" it probably is.


Saving and Investments

Who doesn't want to save some money and put that money to work? But it helps if you know how. Here are three basic steps to understanding the investment world.


Step 1: What is your investment profile?

An investment is a place you put your money in order to make more money. To make good investment decisions, start by determining what type of investor you are.


Determine your funds' accessibility (liquidity)

Everyone has different needs regarding getting a hold of their money. It depends on your personal situation. Before choosing the length or type of your investment, ask yourself if:

? Do I need my money soon? Or later?

? Does my money have to be easily accessible?

If you choose a long-term investment, where you will not touch your money for a long time, you will generally receive a higher interest rate than if you choose a short-term investment. However, if you need the money, you may not be able to have access to it. Think about your options, and especially, get informed!


Determine the level of acceptable risk

Certain investments are very secure, while others represent risks on all levels. The higher the level of risk, the higher your potential return will be. More secure investments generally offer less return but guarantee part or all of your investment. Ask yourself…

? What level of risk can I tolerate?

? What kind of gains am I looking for?

Budget The amount of money that you can invest partly determines where you can invest it. Certain investments require a minimum amount. Get informed.

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