State Securities Regulators Unveil "Top 10 Threats to Investors"
ASAA (the North American Securities Administrators Association) has announced this year's "Top 10" investment scams to alert investors how to avoid being cheated out of hundreds of millions of dollars.
This year NASAA also has supplemented its list of the ten most common ploys with three more investment opportunities that deserve "dishonorable mention." These three investments are: penny stocks; private placements; and investment seminars.
Leading the list of the Top 10 threats to investors are Ponzi Schemes. As an example, in 2004 Pennsylvania securities regulators closed a Ponzi Scheme named Eagle Cash Management Account System and U.S. Estate Group, LLC which claimed to offer 24% returns in advertisements appealing to senior citizens. The regulator was able to return $10.6 million to 300 investors.
Unlicensed individuals selling securities and the sale of unregistered investment products are second and third on the list, respectively. Individuals selling securities must be registered. NASAA observes that those who fail to register "often are predators offering bogus investments." Likewise, investment products (except stocks sold on national exchanges) must be registered with state officials before they can be offered for sale. Unregistered investments include viatical settlements, pay telephone and ATM leasing contracts, promissory notes and investment trusts. NASAA states that most unregistered investments promise limited or no risk and high returns. However, "in almost all cases, the only profits go to the promoters of these schemes and investors are left holding the bag."
Promissory notes are fourth on the Top 10 list. NASAA notes that promissory notes can be good investments for corporate investors and sophisticated investors, but the promissory notes marketed broadly to the public often turn out to be bogus. As an example, Ohio securities regulators uncovered a husband and wife operation that sold $60 million of fraudulent promissory notes to about 740 investors. The couple had no intention of returning the principal or the returns promised. Related to promissory notes are high yield investment scams. According to NASAA con artists no longer use the term "prime bank" as investors have been alerted to that scam. But now one may hear of the term, "risk free guaranteed high yield instrument." Be careful. In 2004 Colorado regulators shut down an international high yield investment scheme that duped more than 1,000 people of about $56 million.
Fraud against seniors is so prevalent that NASAA's 5th spot on the list is entitled "Senior Investment Fraud." Promoters may attempt to sell any and all types of fraudulent investments to seniors as they are easy prey. Seniors are urged to check with their state securities regulators before investing, to determine critical information. That includes determining whether the promoter is registered to sell securities and whether the investment itself is registered to be offered for sale.
Internet investment fraud is 7th on the Top 10 list. NASAA cautions that there has been an increase in "online boiler room" activity promoting penny stocks and microcap stocks. Also, investors should note that the Internet is being used to issue and distribute false news releases about a company to falsely inflate the value of its stock. Of course, in these "pump and dump" schemes, the con artists cash out early at inflated stock prices, leaving investors holding the bag.
Affinity fraud targets investors of a particular religion or ethnic identity "to gain their trust and then steal their life savings." For example, Korean investors, many of whom were elderly, were defrauded of nearly $36 million in a scheme by Won Charlie Yi and his company C+ Capital Management, LLC. California regulators revoked his investment adviser certificate in 2004.
Variable annuity sales practices also appear as a threat to investors. NASAA cites the action against Citizens Financial Group by Massachusetts securities regulators. NASAA alerts investors to several problems with variable annuity sales:
Variable annuities are "not suitable for most seniors";
Investors are not being told about the "high surrender charges and the steep sales commissions"; and
Some investors are misled by claims of guaranteed returns when the returns, in fact, are vulnerable to the volatility of the stock market.
The 10th and final threat to investors are oil and gas scams. Popular in the 80's, these scams have returned with oil prices climbing north of $50 per barrel. Con artists are selling anything from leases in oil fields to investments in unproven technologies designed to convert common substances into fuel. Several state securities regulators took action last year against scams that had victimized many investors.
Investors, beware! In addition to determining whether the promoter is registered to sell securities and whether the investment itself is registered to be offered for sale, NASAA also recommends satisfying yourself that:
The seller has provided written information that fully explains the investment;
The claims made for the investment are realistic; and
The investment meets your personal investment goals.
Hopefully, that way you will avoid having your investment named in next year's Top 10 list!
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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