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"Unlucky 13" Investor Traps Lie in Wait for the Unwary |
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February 19, 2006
"This list is anything but lucky," NASAA President and Wisconsin Securities Administrator Patricia D. Struck said. "Scams come in many disguises, but they all share a common goal of separating victims from their money. As regulators, we are especially concerned that as the first of the Baby Boomers turn 60 this year they not become trapped in bad investments as their retirement nears." NASAA's "Unlucky 13" List of Investor Traps to watch for in 2006 was prepared by the Enforcement Trends Project Group of NASAA's Enforcement Section under the direction of project group chair Michael J. Byrne, Chief Counsel of the Pennsylvania Securities Commission. Struck urged investors to ask the following questions before making any investment:
She also said investors should contact their state or provincial securities regulator with any questions about an investment product, broker or adviser, before making an investment. "One phone call can save a lot of money and misery," she said. NASAA 2006 Investor TrapsWhile the traps below are listed alphabetically, Struck and Byrne identified personal information scams, oil and gas investment fraud, and prime bank schemes as the greatest potential threats to investors this year. • Affinity Fraud. Members of closely knit religious, political, or ethnic groups are targeted frequently by con artists. Their pitch is essentially, "since I am like you and believe like you, you can believe in me and in what I say." • Churning. An abusive sales practice in which unethical securities professionals make unnecessary and/or excessive trades in order to generate commissions. Most churning occurs where a broker has discretion to trade the account. • Equity Indexed Certificates of Deposit. Remember the days of FDIC-insured, bank-issued certificates of deposit with guaranteed principal and interest? Equity Indexed CDs are not the same product. These hybrid securities products offer an interest coupon payment or return that is based on a stock market index, usually the S&P 500. Returns are not FDIC insured. They are dependent on the performance of the stock market. • Oil and Gas Investment Fraud. High oil prices mean oil and gas scams will continue to attract victims. Oil and gas deals are complicated investments that generally require a significant investment, often requiring a minimum deposit of thousands of dollars. • Personal Information Scams. The first step in separating a victim from his or her money is convincing the victim to divulge personal financial information.. Con frequently style themselves as "senior specialists" or adopt a pretext of preparing "living will" or a "living trust." • Prime Bank Schemes. These schemes often promise high-yield, tax-free returns that are said to result from "off-shore trades of bank debentures." These prime bank schemes are the securities equivalent of a purse snatch. Once the seller has your money, it's gone "off shore" forever. • Pump and Dump Schemes. Unethical broker-dealers frequently "pump" up the value of low-priced securities traded on the NASDAQ "pink sheets" and then "dump" the stock after na?ve investors have purchased the stock at inflated prices. These schemes frequently appear through unsolicited e-mail messages. • Recovery Rooms. Scam artists buy and sell the names and financial information of victims who have lost money to "recovery room" operators who promise, in return for a fee that the victim must pay in advance, to recover the money lost in a worthless investment. If you have been the victim of a fraud, never give out your credit card or other personal information to someone who contacts you with a promise to recover your money. • Registered High-Interest Promissory Notes Publicly Advertised. Generally, the higher the return promised, the greater the risk to your money. These notes are not suitable for retirement funds. • Sale and Leaseback Contracts. In an attempt to avoid the investor protections of securities laws, some investments are structured to resemble the sale of a piece of equipment such as a payphone, ATM machine or Internet booth located at a remote venue where the investor cannot service and maintain the equipment and must enter into a servicing agreement. Frequently the equipment or property does not exist and the seller lacks the financial capacity to keep the promise of repurchase. • Self-Directed Pension Plans. Many types of securities fraud require the victim to remove funds from legitimate investments such as stock brokerage accounts, mutual funds, insurance policies, deferred compensation plans and mutual funds so that they can be invested in a worthless scam. While these plans may serve legitimate investment purposes, all too often they only serve to benefit the scam artist. • Unsuitable Recommendations. Just as every investor is different, so too are investments. What may be a suitable investment for one investor may not be right for another. When securities professionals fail to live up to applicable ethical standards, great harm can be done to individual investors. • Variable Annuities. Variable annuities are tax-deferred investments that typically place mutual funds inside of an insurance wrapper for tax deferred potential investment growth. While these products are legitimate investments, regulators are concerned about their popularity in the sales community. Report Your Experience
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