Top 10 Investment Scams

As established by the Washington State Department of Financial Institutions, the following are 10 of the most common types of investment scams and how to protect yourself.

Ponzi Schemes
In this scheme investors are told a cover story about how the business will earn money to allow it to pay high returns to its investors. In fact, the business is earning little or no money. Instead it repays early investors “profits” which are really money raised from new investors. Eventually the scheme collapses when the pool of new investor money runs dry. The scam artists often blame government intervention as the reason why new investors did not get their promised returns.

How to protect yourself:
• When you are offered an investment promising high returns, stop and think before you commit yourself.
• Don’t be swayed by “scarcity” tactics saying that the supply of the investment is limited and you have to act now to make sure you can get in on the deal.
• Do you understand how the investment works?
• If the claimed return for an investment is much higher than other investments make sure you understand the risks of the investment. Remember that if an investment sounds too good to be true, it usually is.
• Check to see if the investment is registered with DFI’s Securities Division or U.S. Securities & Exchange Commission.
• Check to see if the person selling the investment is licensed with DFI’s Securities Division.
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Senior Fraud
Seniors are targeted by scam artists because they are “where the money is.” Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combine to create a perfect storm for investment fraud against senior investors. Older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes, all promising inflated returns. To learn more, visit NASAA’s Senior Investor Resource Center at http://nasaa.org/Investor_Education/Senior_Investor_Resource_Center/.

How to protect yourself:
• Don’t let scare tactics cause you to make a hasty decision to lock up your money in an illiquid investment.
• If there really is something to worry about, take the time to consult with trusted family members and advisors to see what options are available to you.
• Make sure you understand what the costs of the investment are, how much the person selling it will be paid if you buy, and any restrictions or costs that might limit your ability to get your money out if you want or need to.
• Check to see if the person selling the investment is licensed with the Securities Division.
• Check to see if the investment is has been registered with the Securities Division or Securities & Exchange Commission.
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Promissory Notes
A long-time member of the Top 10 list, these short-term debt instruments often are issued by little known or non-existent companies promising high returns — upwards of fifteen percent monthly — with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.

How to protect yourself:
• A promissory note is only as good as the ability of the company to pay on the note.
• Make sure you understand the financial condition of the company and whether it is likely to be in a position to pay you back.
• Make sure you get a financial statement for the company.
• If you aren’t familiar with financial statements, have someone you trust with an accounting background look at the statement for you.
• Check to see if the investment is registered with the Securities Division or Securities & Exchange Commission.
• Check to see if the person selling the investment is licensed with the Securities Division.
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Unscrupulous Brokers
While many investors find their stockbroker’s assistance helpful, they should also take precautions and educate themselves to detect any problems that might occur.

How to protect yourself:
Before you choose a broker:
• Make sure the broker is licensed with DFI’s Securities Division.
• Check to see if the broker has any history of complaints. Call DFI’s Securities Division at 1.877.RING DFI and FINRA’s BrokerCheck Program hotline at 1.800.289-9999.
Once you have established a relationship with a broker:
• Read and keep the materials the broker provides to you. &
• Keep notes of conversations with your broker.
• Review statements carefully to see that your instructions were followed. If you see anything that does not look right, follow up with the broker promptly. If the broker does not answer your questions, speak with the branch manager.
• Remember that it’s your account and your money so make sure that you understand and are comfortable with the level of risk of the investments in your account.
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Affinity Fraud
Con artists know that it’s only human nature for us to trust people who are like us. That’s why scammers often use a victim’s religious or ethnic identity to gain the victim’s trust and then steal his or her life savings. No group seems to be immune from fraud.
How to protect yourself:
Just because others you know have invested does not mean that an investment is right for you.
• Invest only if you understand how an investment works.
• Check to see if the investment is has been registered with DFI’s Securities Division or Securities & Exchange Commission.
• Check to see if the person selling the investment is licensed with DFI’s Securities Division.
• Ask what the person selling the investment will be paid if you buy the investment.
• Remember that if an investment sounds too good to be true, it usually is too good to be true.
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Unlicensed Securities Sellers
Fraudulent and high-risk investments, such as promissory notes, oil and gas deals, gold or mining stock, and viatical settlements continue to be sold by unlicensed individuals. Scam artists continue to entice independent sales agents into selling investments they may know little about. The person running the scam instructs the independent sales force — sometimes investment advisers, insurance agents or accountants — to promise high returns with little or no risk.

How to protect yourself:
• Check to see if the investment is has been registered with DFI’s Securities Division or Securities & Exchange Commission.
• Check the status of a securities seller’s license with DFI’s Securities Division.
• Find out whether the seller has been the subject of any complaints.
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Prime Bank Schemes
Another perennial favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world’s elite or “prime” banks. Now it is common to avoid the term “Prime Bank” altogether and underplay the role of banks by referring to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive. These “High Yield Programs” often reference the use of “treasury securities,” ”letters of credit” or similar methods. Scammers often use the allure of “tax free” money by using “offshore accounts” to entice investors.

How to protect yourself:
• Don’t fall prey to fantasies of great wealth.
• Beware if you are sworn to secrecy about the investment.
• Make sure you understand the investment. If it sounds too good to be true, it probably is.
• Check to see if the investment is has been registered with DFI’s Securities Division or Securities & Exchange Commission.
• Check to see if the person selling the investment is licensed with DFI’s Securities Division.
• Don’t let your natural dislike of paying taxes cause you to invest in an offshore scheme where you lose control of your money. It’s better to pay some tax on the profits from your investment than to lose your whole investment to schemers.
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Internet Fraud
Scams using the Internet have rapidly increased as scam artists have found that it is a cheap and anonymous way to reach their potential victims. Most Internet scams are not new, but simply done online rather than by mail, telephone or in person. Spam e-mails, chat rooms and online investment “newsletters” often promote stocks with hype and false information in the hope that unsuspecting investors looking to make a “quick profit” will buy and drive up the price of the stock. Unfortunately, it is the promoters of the hype and false info who are able to sell their shares and leave investors “holding the empty bag” when the price stock crashes. Internet scam artists can be difficult to identify and may be located out of the country, beyond the reach of U.S. laws. Investors should ignore e-mail offers from individuals representing themselves as Nigerian or West African government, business officials or anyone in need of help to deposit large sums of money in overseas bank accounts. Don’t be dot.conned.

How to protect yourself:
• Ignore unsolicited e-mail offers of investments. If you get an e-mail pitching a deal that can’t be beat, hit delete.
• Ignore “phishing” e-mail messages that ask you to provide identifying information such as your birth date or social security number to update the records at your financial institution.
• Don’t rely solely on what you read on a Web page.
• Remember that it is easy for scam artists to create slick and professional looking websites or post false information.
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Free Lunches and Dinners
Many seniors are being targeted with dubious free lunch or dinner seminars advertised as “educational.” A yearlong study of free-meal investment seminars by state securities regulators across the nation highlighted the abusive tactics sometimes employed by seminar sponsors. Out of 110 supposedly “educational” seminars examined, all were actually sales presentations. Half of the seminars featured exaggerated or misleading claims about the performance of products being offered. Thirteen percent of the seminars were completely fraudulent.

How to protect yourself:
• Look at your alternatives before investing.
• Talk with trusted advisors or family members.
• Just because a sales agent did you a small favor, such as providing a meal does not mean you have any obligation to invest. Evaluate any investment offered on its merits, not on whether you received a favor from the seller.
• Ask what firm the presenter represents and what products he or she sells.
• Remember there are no free lunches.
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Telemarketing Fraud
Hundreds of “boiler rooms” or high-pressure telephone sales operations peddle illegal or fraudulent investment products nationwide. These individuals will gladly accept the life savings of elderly persons who will never be able to recoup their loss. Many victims must return to the work force instead of enjoying the comfortable retirement they deserve, and the stress of their losses can have a deep impact on their emotional and physical well-being.

How to protect yourself:
Don’t let your politeness make you a victim:
• If you get an unsolicited telephone call offering a product, it’s OK to hang up. If you start talking with the caller, it is easy to begin to see the caller as a friend. It’s harder to say no to a friend, so it is best not to let the conversation get started.
• Practice what you will tell callers making unsolicited offers over the telephone: “Thank you, but I don’t buy anything over the phone. [Click]”

If you believe that you are the victim of a securities fraud, The White Law Group maybe able to help. To speak to a securities attorney, please call our Chicago Office at 312-238-9650 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investors protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

To learn more about The White Law Group, visit https://whitesecuritieslaw.com.