Beware investor traps

Con artists prey on those desperate for easy money

August 30, 2009 

N.C. Secretary of State Elaine F. Marshall recently released her list of the Top 10 Investor Traps of 2009. During tough economic times, investors need to take even more care to avoid scams, she said. For additional information, contact her office's Securities Division at 800-688-4507, or visit the agency's Web site at www.sosnc.com.

1. Entertainment investments. These unregistered investments, encompassing a variety of products including movies, infomercials, Internet gambling and porno graphy sites, promise high returns while offering little disclosure of risk.

2. Gold bullion and currency scams. With the high price of gold, investors should beware of gold bullion scams in which the seller offers to retain "purchased" gold in a "secure vault" and promises to sell the gold for the investor as it gains in value. In many instances the gold does not exist. Similar are the many forms of foreign exchange (forex) trading schemes. Trading in foreign currencies requires resources far beyond the capacity of most individual investors.

3. Leveraged exchange-traded funds (ETFs). This relatively new financial product has been offered to individual investors who may not be aware of the risks these funds carry. The funds, which trade throughout the day like a stock, use exotic financial instruments, including options and other derivatives, and promise the potential to provide greater than market returns as the value of the underlying assets rise or fall. Given their volatility, these funds typically are not suitable for most retail investors.

4. Life settlements. State securities regulators long have been concerned about life settlements, or viaticals, and the rising popularity of these products among investors has prompted a recent congressional investigation. Though life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, there are seriously different risks between taking advances on one's own policies versus investing in commercially bundled viaticals.

5. Ponzi schemes. Despite the heightened awareness of Ponzi schemes following Bernard Madoff's multibillion-dollar fraud and 150-year prison sentence, these scams continue to trap investors. The Ponzi scheme is a house-of-cards swindle in which high returns are paid to initial investors out of the funds of later investors, who end up losing all or most of their money to the promoter. Beware of investment opportunities promising high and steady rates of return.

6. Real estate investment schemes. State securities regulators have noted a rise in scams disguised as offers to help homeowners caught up in the turbulent housing market "save" their homes or "fix" their mortgages, usually in exchange for a fee paid in advance. "Most of these advance-fee offers generate a quick profit for the con artist but provide no benefit to the consumer," Marshall said. Some homeowners, particularly seniors, may be attracted to reverse mortgages, which are a legitimate lending option. However, the resulting lump sum home equity payment makes them an attractive target for unscrupulous salesmen, who may attempt to direct these funds toward worthless or unsuitable investment products.

7. Natural resource investments. The Secretary of State's Office expects to see a rise in energy and precious metals scams promising quick, high returns. Investors anxious to recover losses incurred during the recession may be attracted by oil and gas schemes, as well as fraudulent offerings of investments tied to natural gas, wind and solar energy, and the development of new energy-efficient technologies.

8. Private placement offerings. Private placements offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors as opposed to a public offering made through national securities markets. State securities regulators are concerned about private placement offerings that are later discovered to be fraudulent, especially those made under a federal registration exemption (Regulation D, Rule 506). Companies using this exemption can raise an unlimited amount of money without registering the offering with the SEC as long as they meet certain standards. Although properly used by many legitimate issuers, the exemption has become an attractive option for con artists, as well as individuals barred from the securities industry and others bent on stealing millions of dollars from investors through false and misleading representations.

9. Short-term commercial promissory notes. Many seniors have lost their life savings by investing in short-term commercial promissory notes that are nine months or less in duration. These notes may be touted as being "insured" or "guaranteed," but often the supposed insurers are fictitious, or the insurance companies are located outside of the United States, are not licensed to do business in this country, and lack the resources necessary to deliver on the promised guarantees. Unlike publicly advertised promissory notes, promoters of these notes usually attempt to use commercial paper exemptions as a basis for selling the products without registration. The commercial paper exemptions apply only to high-grade commercial paper traded by major corporations -- not to these risky notes pushed to the public by a sales force paid with extremely high commissions.

10. Speculative inventions and new products. New products are for venture capitalists who know how to assess the risks. They are not good investments for your retirement money, even though they may promise high returns.

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