Beware of These Top 10 Investment Scams
By Ric Edelman
Follow your nose. If an offer smells fishy, it’s probably bad.
Recent worries about the economy, coupled with poor investment performance, have caused some consumers to swear off traditional, well-known investments in favor of others that offer promises of higher returns and lower risks. But be careful: Many of those investment offers are actually frauds, and you’ll lose all the money you spend on them.
To help you avoid getting ripped off, the North American Securities Administrators Association offers the following “Top 10” list of investment scams. If you’ve invested in any of these, talk with us or your state securities regulator right away.
1. Distressed real estate schemes. Investment pools targeting distressed property are increasingly popular with con artists. Do your homework before investing in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress. Just like other securities, real estate ventures must be registered with state securities regulators.
2. Energy investments. Swindlers tout the mystique of untapped oil and gas reserves and bountiful production. Even genuine oil and gas investments bear a high degree of risk. Understand that you could lose your total investment, even in legitimate ventures. Energy investments tend to be poor alternatives if you are seeking income in retirement.
3. Gold and precious metals. Higher prices and the promise of an ever-appreciating “tangible” asset have lured the unsuspecting into a variety of scams. Many recent ones are variations on old themes — like 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 they would store or trade for investors in special markets for high profits and returns.
4. Promissory notes. Unregistered or fraudulent promissory notes give a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry risk. Most promissory notes and their sellers must be registered with state securities regulators. Such notes often are covers for Ponzi schemes and other scams. Check with your state regulator.
5. Securitized life-settlement contracts. Legitimate life-settlement contracts involve a high degree of risk; investors may be responsible for routinely paying costly premiums for people who outlive their life expectancies. Now crooks are embracing new schemes to deceive even cautious investors into believing that contracts with added securities such as bonds are safe. Many have left victims holding worthless paper. Practices
6. Affinity fraud. Marketing a scheme to members of a particular group continues to be lucrative for Ponzi scheme operators and other fraudsters. The elderly or retired and religious and ethnic groups are common targets because scammers rely on trust. Examples: A member of a large Amish community recently bilked his brethren of millions of dollars in an investment scam. And a trusted officer of a Croatian credit union was accused of stealing members’ deposits over several years.
7. Bogus or exaggerated credentials. These are used to imply special expertise or training in advising senior citizens on financial matters. Despite laws in 29 states to curb the practice, there is an increase in the use of bogus credentials or designations such as nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Always press for full disclosure and the meaning behind all designations, and check to confirm with your state regulator.
8. Mirror trading. This scheme is promoted as an automated trading platform that ensures you will participate in real-time transactions placed or executed by a skilled and knowledgeable third party. Supposedly, whenever that party executes a trade, the same trade is mechanically placed in your account. Be cautious. Continue to objectively evaluate all new investment platforms.
9. Private placements. A federal rule that provides filing exemption for private placement offerings has been used by unscrupulous promoters. This year U.S. and Canadian authorities convicted three people of criminal fraud 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. They organized their company in the Bahamas, sold the securities from a boiler room in Ontario, and told investors the company was located in Kentucky.
10. Advice from unlicensed agents. Complaints are on the rise about unlicensed salesmen, such as insurance agents, who give investment advice or make securities transactions. Recommendations often turn out to be unsuitable or put investors in underperforming products or those with hidden fees or long lockup periods. Insist that anyone giving you advice produce a proper license.