DebtFreeGuru.com's - Tip of the Week - Monday, January 3, 2005
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Top
10 investing scams
Someone's always ready to empty the pockets of the investor who's overly eager for outsized returns. Here are the most prevalent schemes.
By
Kay Bell and Amy Fleitas, Bankrate.com (As seen on MSN)
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 is investment fraudsters targeting seniors.
"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."
A promise of 40% returns?
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% 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
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,
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% monthly, with little or no risk.
Bad brokers and not-really-brokers
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
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.
Conspiracies behind every tree
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."
Funds and annuities
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
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."
DebtFreeGuru.com - Tip of the Week - Monday, January 3, 2005
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