Top 10 Investment Scams (NASAA.org)

August 23, 2011
Con Artists Find Profit in Get-Rich Schemes Tied to Economic Uncertainty
NASAA Identifies Investor Threats Among Financial Products and Practices

WASHINGTON (August 23, 2011) – The North American Securities Administrators Association (NASAA) today released its annual list of financial products and practices that threaten to trap unwary investors, many by taking advantage of investors troubled by lingering economic uncertainty and volatile stock markets.

“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.

Massey said headline-related investor complaints reaching state and provincial securities regulators include questionable claims, such as: “Realize safety and appreciation in gold;” “Wave energy: the future to power our homes;” “Synthetic fuels take the oilman out of our pockets;” and “Invest in foreclosed homes, help others and make a fortune!”

“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” Massey said. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”

The following alphabetical listing of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section.

PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.

PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.
Massey urged investors to learn the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment. State and provincial securities regulators provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered.

“Investors should do business only with licensed brokers and investment advisers and should report any suspicion of investment fraud to their state or provincial securities regulator,” Massey said.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.


2011 NASAA Top Investor Traps and Threats


Products

Distressed Real Estate Schemes. Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors. Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully. Just like other securities, interests in real estate ventures also must be registered with state securities regulators.

In February 2011, a Florida man pleaded guilty to conspiracy to commit mail and wire fraud in a scheme that solicited $2.3 million from 39 investors nationwide to purchase and refurbish distressed properties and, in turn, sell them for a profit. Investors were issued corporate promissory notes with returns of up to 12 percent. Investigators determined that the investments were used for personal gain and to make Ponzi-type distributions to other investors.

Energy Investments. Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.

Colorado securities regulators issued a cease and desist order earlier this year against a Texas oil and gas company for allegedly violating state securities registration and licensing provisions. The case came to light after a company sales agents unwittingly “cold called” an employee of the Colorado Division of Securities and offered a joint venture interest in two Pennsylvania oil wells with next to no drilling risk.

Gold and Precious Metals. Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.

In 2011, the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported “leverage” financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a “clearing firm.” State and federal investigators found that the clearing firm delayed or ignored requests by investors to sell their precious metals investments. Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was purchased.

Promissory Notes. Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations. Often initially pitched as personal loans or short-term business arrangements, most promissory notes and the persons who sell them must be registered with state securities regulators. Unregistered promissory notes are often covers for Ponzi schemes and other scams. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered.

A former FBI agent was convicted in Alabama this year after an investigation by Alabama securities regulators revealed that he used promissory notes guaranteeing returns as high as 12 percent to lure investors into a Ponzi scheme. The funds were to be invested in real estate and medical technology ventures, but investigators determined that the former agent used most of the funds, more than $4 million, to pay Ponzi-style returns to previous investors and for his personal use.

Securitized Life Settlement Contracts. Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies. Outside the legitimate offerings, crooks are embracing new schemes to deceive even cautious investors. For example, “securitized” life settlement contracts are increasingly popular investments that combine life settlement contracts with traditional securities, such as bonds that supposedly guarantee a fixed return on a fixed date, regardless of whether the insured outlive their life expectancies. This risk-reducing structure has too often proven fraudulent and left victims with nothing but worthless paper issued by a bonding company that does not maintain sufficient assets to fulfill the guarantee, operates in an unregulated overseas territory or simply does not exist.

In 2011, two executives of National Life Settlements LLC of Houston were indicted on charges of securities fraud and the sale of unregistered securities after an undercover investigation by Texas securities regulators determined the pair had sold $30 million in unregistered promissory notes secured by life settlement contracts. One of the executives was a three-time convicted felon with a long history of investment fraud. The promise of a safe investment with annual returns as high as 10 percent served as bait to lure investors into what a court-appointed receiver testified was a Ponzi scheme. The company sold these unregistered investments largely to retired teachers and state employees through a network of financial professions, including insurance agents and securities brokers. The criminal indictment alleges that investors' money was spent on commissions and personal expenses, including the purchase of houses and cars.

Practices

Affinity Fraud. Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. A recent national study of Ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme's credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups, and ethnic groups. Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter.

A 73-year-old North Carolina man pleaded guilty this year to 19 felony counts of securities fraud following an investigation by North Carolina securities regulators that determined he had collected more than $18.5 million from more than 100 investors, many of whom he knew from church or other social circles. The investments for venture capital investments in various unspecified companies came with a promissory note guaranteeing annual returns of between 10 and 50 percent. Bank records revealed a Ponzi scheme using money from new investors to pay returns to previous investors.

Bogus or Exaggerated Credentials. State securities regulators have led the effort to prevent the misuse of credentials or designations intended to imply special expertise or training in advising senior citizens on financial matters. Since 2008, 29 states have adopted laws or rules preventing such misuse. Now, state regulators are noting an increase in the use of other bogus credentials or exaggerated designations. State securities regulators have encountered salesmen pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Others have boasted of impressive sounding designations that prove to be meaningless. In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials.

Securities regulators in Utah came across a broker who listed “C.H.S.G.” after his name on his business card. When asked, the broker told regulators the initials stood for “Certified High School Graduate.”

Mirror Trading. The securities market is constantly evolving to provide investors with new products, different platforms and a variety of choices. The latest evolution is “mirror trading,” which is promoted as an automated trading platform that ensures investors will participate in real-time transactions placed or executed by a skilled and knowledgeable third party. Whenever the third party executes a trade in his or her account, the same trade is mechanically placed on behalf of the investor in the investor’s account. Investors should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms. They should also recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a way to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.

Private Placements. Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight. In the United States, the federal exemption for private placement offerings provided under Rule 506 of Regulation D continues to be abused by criminals. Although properly used by many legitimate issuers, unscrupulous promoters use Rule 506 to cloak an otherwise fraudulent offering in legitimacy.

In 2011, U.S. and Canadian authorities convicted three individuals of criminal fraud charges related to the sale of $33 million in oil and gas private placement offerings. The defendants claimed the securities were exempt from registration under Rule 506. In an attempt to avoid regulatory scrutiny, the defendants organized their company in the Bahamas and sold the securities from a boiler room located in Ontario, Canada, while telling investors the company was located in Kentucky. Securities regulators also have taken civil fraud actions against private placement issuers, Medical Capital Holdings, Inc. and Provident Royalties, which raised more than $500 million from investors though private offerings sold by dozens of broker-dealers. The companies are alleged to have defrauded investors by misrepresenting the use of the investment proceeds and misappropriating millions in investor funds.

Securities and Investment Advice Offered by Unlicensed Agents. State securities regulators have identified a consistent increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving investment advice or effecting securities transactions. For example, insurance agents offering securities or investment advice without a securities license have not demonstrated sufficient expertise to legally recommend that an investor liquidate securities holdings in favor of insurance products. Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.

In 2011, an insurance agent unlicensed to sell securities and his manager were barred from working in the Missouri securities industry for five years after Missouri securities regulators uncovered a complex scheme that saw the liquidation of more than $7 million in securities investments from 180 customer accounts. Agents had moved most of these funds into proprietary fixed or equity indexed annuities.



For more information:
Bob Webster, Director of Communication
202-737-0900

Top 10 Investment Warnings for 2011 (Utah Division of Securities)

01/03/2011

Utah Division of Securities identifies Top Ten Investment Alerts for 2011

Francine A. Giani, Executive Director for the Utah Department of Commerce announced that the Division of Securities has released a top ten list of investment warnings for 2011. The list details fraudulent activity tracked by the Division of Securities over the past year and offers predictions on which investment schemes to watch for in 2011.

“Securities fraud continues to make headlines so we are asking citizens to add financial resolutions to their New Years list,” said Francine A. Giani, Executive Director of the Utah Department of Commerce.

“During fiscal year 2010, our office had over $5.3 million dollars in total fines for fraud cases which is more than twice what was assessed in 2009,“ said Keith Woodwell, Director of the Division of Securities, ”As consumers look to re-energize their retirement investments in the New Year, we urge investors to protect their nest egg by checking out a promoter’s background and any investment offer with our Division.”

Utah Division of Securities Top Ten Investment alert predictions for 2011

1. Affinity Fraud - Affinity fraud is when someone abuses membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Common affinity groups include religion, ethnicity, profession, education, common handicaps, language, age and any other common likeness or shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation with a given group, investors should obtain and review a disclosure document that explains the investment opportunity, the background of the management, the amount of money to be raised, the intended use of the money raised, and all the risks associated with making an investment. Upon receipt, investors should review all disclosures with an independent accountant, attorney, or investment professional to receive an unbiased opinion of the investment and the person offering the investment.

2. Inverse and Leveraged ETFs - Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track—or both—are growing in number and popularity. While such products may be useful in some sophisticated, short-term trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Most leveraged and inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time, particularly in volatile markets. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session.

3. FOREX Trading Programs - The most successful perpetrators of investment scams cloak their scam in a veil of legitimacy. FOREX is a term used to describe the legitimate foreign currency exchange market. The value of one nation’s currency, as compared to another nation’s currency, fluctuates on a continuous basis. These fluctuations can sometimes be quite dramatic and depend on innumerable complex factors. Due to the complexity of factors affecting the exchange rate of one currency to another, speculative FOREX trading bears a high level of risk. Despite the risk inherent in FOREX trading, there is always someone new who thinks they can simplify this complex market into a “fail-safe,” “low risk” or “no risk” system that “guarantees” the preservation of capital and significantly higher rates of return than can be achieved investing elsewhere. These FOREX trading programs are often designed to automatically engage in currency trades based on predetermined events or algorithms that the designer has “developed after years of personal experience and working with the top minds in the financial services industry.” The FOREX trading program designer may simply want an individual to purchase this trading system as an investment. Then it is up to the investor to generate the returns or, more likely, discover the flaws in the “fail-safe” system. The investor may also be enticed to invest directly with the individual who has developed this system, who will then trade on investors’ behalf. Unfortunately, under these common circumstances, the person who collected the money may or may not ever invest the funds before they regrettably inform investors some tragic unforeseen event has caused the loss of capital. In fact, in several cases investigated by the Division of Securities, promoters who have promised “guaranteed” returns in their “proprietary” FOREX trading programs have simply stolen the money and spent it on supporting their own lifestyles.

4. Structured Investment Products - Structured investment products are securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency. As the definition suggests, there are many types of structured products from market-indexed CDs offering protection of the principal invested, to a multitude of other structured notes and investments that offer limited or no protection of the principal. The Division’s greatest concern with structured products is the investors’ ability to fully understand the investment. Structured product disclosures are generally complex, making it difficult for the average investor to comprehend them. Without an effective understanding of the investment the investor can have a difficult time knowing the risks, costs, liquidity, and tax-consequences associated with the investment.

5. Promissory Notes - Promissory notes are a written promise to pay a specified amount, to a specific entity at a specific time or upon demand, with or without interest. Promissory notes offered to retail investors carry significant risk. When investing, higher returns are accompanied by a proportionate amount of risk. A track record of paying high interest and even repaying principal is not an assurance that you will get your money back if the company fails. Early investors in a Ponzi scheme often receive interest payments and in some cases principal. Promissory notes are rarely suitable for retirement money, or money borrowed against equity in ones home.

6. Start-up Companies on the Verge of “Going Public” - The lure of getting in on the “ground floor” of a hot start-up business is a classic temptation for investors. Promoters know this, but they also know the deal will be much sweeter if they can promise not only great profits, but also a way for the investor to cash out those profits relatively quickly, if necessary. Unscrupulous persons will often claim that the shares being sold to investors are on the verge of “going public” and will be freely traded on a major exchange. Frequently, promises are made that the shares will trade at a specific future price of $5.00 to $10.00 or more per share. In most of these cases, the reality is that no such public offering is being seriously pursued. “Going public,” in the sense promised by these promoters, is actually a highly expensive and time-consuming process that requires considerable assistance from legal, accounting, and investment banking firms. Only larger, more well-established businesses are usually in a position to register their shares for trading on a major exchange and to pay the ongoing regulatory costs of public registration. If approached by promoters making such promises, investors should contact the Division of Securities and the Securities and Exchange Commission to verify that the required registration statements have been filed.

7. Investment Pools Purchasing Non-Performing Loans - By the time the housing bubble burst, the mortgage and banking industries had made many loans they shouldn't have. As the housing and commercial real estate markets folded, those loans (and pools of those loans) stopped producing revenue, freezing lines of credit in the economy and contributing to the Great Recession. Many financial institutions have since collapsed under the weight of these non-performing loans, leaving the institution's assets to be auctioned off to willing buyers. The Division of Securities has seen a rising number of Utahns seeking to earn big returns by purchasing these non-performing loans. However, as with all investments, investors should remember the risk-reward principal: the greater the potential return, the greater the risk. Despite the ads on late-night television and the Internet, or the stories told during seminars and sales pitches, turning a profit on non-performing loans is a complicated and difficult undertaking. Enterprising individuals have created funds to pool investor money and purchase these non-performing loans. These pooled investment funds present additional risk to the investor and should be fully disclosed in a disclosure document (e.g., private placement memorandum). Investors should read the disclosure document carefully before investing in any pooled investment fund and only invest funds which they can afford to lose. Lastly, investors should always verify whether their investment professional (or the fund manager) is properly licensed and whether the fund itself is properly registered by contacting the Division of Securities.

8. Automatic Trading Software Packages - Some investors have resorted to using a computer to make investing decisions for them. Companies are selling computer software programs that analyze the market and make trades for the investors. Typically, an investor purchases the program, sets up a brokerage account, and places money into the account. The computer program will “track” and “analyze” the market and decide which trades to make. The account is linked up to a brokerage firm which will then make the actual trades based on the computer’s recommendation, using the funds from the investor’s account. Often, a promoter will not just sell the computer package, but will have “openings” for investors to participate in the program. Investors are charged a start up fee and commission fees in addition to the investment funds. Investors should be cautious when evaluating offers of such automatic-trading software packages. The Division encourages investors to do their own due diligence on those selling the programs or promoting them and ensure that you are dealing with licensed professionals. The Division of Securities also cautions any purchasers of such packages against the common practice of allowing family members or friends to “piggy back” on the purchaser’s account by co-mingling funds. The purchaser of the package may expose himself to liability for acting as an unlicensed investment adviser.

9. Iraqi Dinars - Since the beginning of the Iraq War in 2003, speculators have sought to profit by purchasing Iraqi Dinars. Unfortunately, the likelihood of investors seeing any return on their dinars is slim to none. This scam comes in three parts: the hyped returns that play on an investor's greed, the deceptive practices of Iraqi Dinar dealers, and the fundamental misunderstanding of international finance. Currently valued around 1,200 dinars to 1 U.S. Dollar, any appreciation in the value of the Iraqi Dinar would theoretically generate profit, but many websites selling Iraqi Dinars boast these returns could reach up to 1000 percent. Investors need to understand these figures for what they are: speculation and hype. Websites selling dinars also exaggerate or misrepresent history as proof that such profits are possible, but history teaches a vastly different lesson. First, the rapid appreciation of any currency's value is extremely rare (the opposite is much more likely), meaning investors should consider this a long-term gamble not a short-term guarantee. Second, investors may confuse the appreciation of a currency's value with demonitization, which is the process of governments replacing their old currency with a new currency. While Iraq is not likely to do so again (Iraq demonitized from October 2003 to January 2004), exchanging old currency for new currency still keeps the value in U.S. Dollars roughly the same. So new currencies do not generally indicate a new value. While hard currency scams are not new, the methods have evolved. Currency dealers previously avoided regulation by relying on the currency's numismatic value (treating the currency as a collector's item), now these dealers often register with the U.S. Treasury as a Money Service Business (MSB). An MSB registration is nothing more than a check-cashier or a money transmitter; it does not reflect any experience in trading currency nor entail any qualifications on the part of the dealer. The reason dealers seek this meaningless registration is to lend legitimacy to their scam and avoid proper regulation, which would entail oversight and require full disclosure be made to investors. Additionally, since no exchange exists for the Iraqi Dinar, dealers can charge whatever they want to sell and buy back the dinars. Investors should fully understand that a small increase in value will not likely be enough to breakeven after these fees are considered. Worst of all, some websites have even been selling counterfeit dinars. Ultimately, however, the power of hard currency scams come down to a subject most are unfamiliar with: international finance. The market determines currency values based on numerous factors. In the case of Iraq, many of these factors are political and unpredictable, making dinars a risky bet at best. Of all the risks though, inflation is the greatest. As an economy improves, workers find jobs and earn more money, increasing demand and, therefore, prices. As prices rise, the value of the currency falls. Another inflationary pressure may be the Iraqi government itself. As the Iraqi government seeks to improve conditions, it may be tempted to monetize their debt (essentially, print more money) and drive inflation further. Combating inflation is difficult for established governments and economies, let alone one emerging from a dictatorship, a war, and an ongoing insurgency, so even the best scenario of an improved Iraqi economy may not lead to profits for investors in Iraqi Dinars.

10. Unsuitable Variable Annuity Sales Practices - Aggressive marketing of variable annuity insurance products are a concern, especially when seniors are targeted. Sales pitches, which are frequently offered in conjunction with free lunch seminars, are sometimes used in an attempt to scare or confuse investors by claims that these products will protect or insure them against any market losses. While variable annuities can be appropriate as an investment in some circumstances, investors should be aware of restrictive features including potential surrender charges, tax penalties for early withdrawals, and limitations on the insurance guarantees. Brokers and investment advisers recommending variable annuities must collect information about your financial status to assess if a variable annuity is suitable for your individual circumstances. Protect yourself by asking the sales person to explain guarantees, liquidity issues, fees and market risks.

Three questions every investor should ask:


1.Is the person offering the investment licensed? Find out by calling the Division of Securities at (801) 530-6600.
2.Is the stock offering registered? All securities sold in the state must be registered or exempt. Before you invest your money, call the Division of Securities to make sure it is a legitimate offering.
3.Did the promoter give you a written prospectus summarizing the investment? Did he or she give you a copy of the financial statements showing how the company is doing? Has the promoter disclosed his or her prior business success or any previous criminal convictions or bankruptcies?

The Seven most common warning signs of investment fraud are:


1.Promises of high returns. Any claim that you can double your money in six months is a fraud.
2.Claims that the investment is guaranteed or that it has little or no risk.
3.Pressure to invest immediately because there is a deadline or only a few openings left.
4.Encouraging you to borrow money from equity in your home to maximize the profit you can make. Because all investments involve risk, no legitimate securities broker will recommend using home equity to make an investment.
5.Vague descriptions about how your money will be used or what the company does.
6.Claims that other people have already checked out the investment and are investing. These may include well-known members of the community or people within your affinity group (your church, workplace, or service organization).
7.The assertion that this investment involves new technology that can solve a problem that big companies in this industry have been unable to solve (such as drilling for oil in new places, new pharmaceuticals that cure well-known diseases, or high-tech inventions).

Investors should do business with licensed securities brokers and advisers and report any suspicion of investment fraud to the Utah Division of Securities by calling (801) 530.6600; toll free at 1.800.721.7233 or logging on to www.securities.utah.gov.