NASAA’s 2005 Top 10 Threats to Investors

Widmann: “If it sounds too good to be true, it usually is” 

WASHINGTON (March 24, 2005) – The North American Securities Administrators Association (NASAA) today identified the most common ploys being used to cheat investors out of hundreds of millions of dollars.

“Investors should keep their guard up anytime anyone offers an investment opportunity. It pays to remember that if an investment sounds too good to be true, it usually is,” said Franklin L. Widmann, NASAA’s President and Chief of the New Jersey Bureau of Securities.

The following ranking of NASAA’s Top 10 threats to investors for 2005 is based on the order of prevalence and seriousness as identified by an annual survey of state securities regulators. Click on a title for details:


1. PONZI SCHEMES
The premise is simple: pay early investors with money raised from later investors. The only people who make money are the promoters who set the Ponzi in motion.

2. UNLICENSED INDIVIDUALS SELLING SECURITIES
Anyone selling securities without a valid securities license should be a red alert for investors. Remember: No license, no sale.

3. UNREGISTERED INVESTMENT PRODUCTS
Con artists bypass stringent state registration requirements to pitch viatical settlements, pay telephone and ATM leasing contracts, and other investment contracts with the promise of “limited or no risk” and high returns.

4. PROMISSORY NOTES
Empty promises can leave these notes worth less than the paper on which they are printed.

5. SENIOR INVESTMENT FRAUD
Because they have built a lifetime of savings, seniors continue to face investment fraud by con artists peddling unsecured promissory notes, viatical settlements and other investments that are either fraudulent or unsuitable for them based on their particular financial needs.

6. HIGH-YIELD INVESTMENTS
Con artists lure investors with promises of triple-digit returns through access to “risk free guaranteed high yield instruments” or something equally deceptive.

7. INTERNET FRAUD
Stock promoters are using online “boiler rooms,” instant messaging, and fake websites to lure investors into “pump-and-dump” stock schemes.

8. AFFINITY FRAUD
Con artists are increasingly targeting religious, ethnic, cultural and professional groups.

9. VARIABLE ANNUITY SALES PRACTICES
Senior investors, in particular, should beware of the high surrender fees and steep sales commissions agents often earn when they move investors into variable annuities.

10. OIL & GAS SCAMS
With oil prices at record levels and continued Middle East instability, regulators warn that con artists may renew schemes promising quick profits in oil and gas ventures.

Dishonorable Mention
Three investment opportunities also were cited for “dishonorable mention,” including:

  • penny stocks
  • private placements, and
  • investment seminars.

Before You Invest

  • Before making any investment, Widmann urged investors to ask the following questions:
  • Are the seller and investment properly licensed and registered in your state?
  • Has the seller given you written information that fully explains the investment?
  • Are claims made for the investment realistic?
  • Does the investment meet your personal investment goals?

Widmann also urged investors to 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 heartache,” he said.


NASAA’s 2005 Top 10 Threats to Investors

1. PONZI SCHEMES. Named for swindler Charles Ponzi, the premise is simple: use money from later investors to pay early investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. In 2004, the Pennsylvania Securities Commission broke up a massive Ponzi scheme and returned $10.6 million to 300 investors in Pennsylvania, Delaware, Florida, New Jersey, and Australia. Pennsylvania regulators issued a cease-and-desist order to Eagle Cash Management Account System and U.S. Estate Group, LLC following an investigation into claims of 24 percent returns in advertisements appealing largely to senior investors.

2. UNLICENSED INDIVIDUALS SELLING SECURITIES. Individuals who sell securities or provide investment advice are required to earn a license by passing rigorous examinations before they can offer their services to the public. Those who bypass this requirement often are predators offering bogus investments. Unlicensed people selling unregistered securities should be a red alert for investors. Con artists also frequently use the promise of high commissions to lure some insurance agents, investment advisers, accountants, and lawyers who are not licensed to sell securities into selling investments they may know little about, such as bogus limited partnerships or promissory notes. In Florida, for example, an unregistered broker who sold unregistered securities was ordered to pay $290,000 to 29 victims. An Ohio man who was not licensed to sell securities was sentenced to 4 years in prison and ordered to pay $1.5 million after an investigation by the Ohio Department of Commerce’s Division of Securities determined he targeted African-American investors (see affinity fraud below) and eventually sold $7.9 million in fictitious 12-month investment certificates to approximately 140 investors in Ohio and five other states by promising rates of return of 30 percent to 400 percent per year.

3. UNREGISTERED INVESTMENT PRODUCTS. It pays to remember that legitimate investment products, excluding stocks sold on national exchanges, must be registered with state officials before they can be offered for sale to the public. Con artists bypass this requirement because they know that stringent state registration requirements protect investors from their offerings of viatical settlements, pay telephone and ATM leasing contracts, promissory notes, investment trusts, and other unregistered securities. Most unregistered investments promise “limited or no risk” and high returns. In almost all cases, the only profits go to the promoters of these schemes and investors are left holding the bag. The Arizona Corporation Commission ordered Integrowth Financial Group to return over $2.3 million in investor funds and to pay a total of $100,000 in penalties for ignoring previous orders to stop selling unregistered investment contracts such as viatical settlements, pay telephone contracts, ATMs and an investment trust. In New Jersey, securities regulators obtained a court order freezing the assets of an unregistered broker who sold more than $4 million in fraudulent and unregistered securities to investors. State officials alleged the broker fraudulently diverted hundreds of thousands of dollars in investor funds for his personal use, including the installation of a swimming pool and landscaping at his home for nearly $40,000; and purchases of a $78,000 Land Rover, a Corvette and two BMWs.

4. PROMISSORY NOTES. For sophisticated or corporate investors, promissory notes can be a good investment, providing a reasonable reward for those who are willing to accept the risk. However, promissory notes that are marketed broadly to the general public often turn out to be scams. For example, Ohio securities regulators in 2004 broke up a husband-and-wife team that sold $60 million in promissory notes to approximately 740 investors, predominantly to residents of northeast Ohio. Promissory notes are sold as instruments that guarantee above-market, fixed interest rates, while safeguarding their principal. When interest rates are low, investors may be enticed 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; leaving the note worth less than the paper on which it is printed. For more information, see NASAA’s Investor Alert.

5. SENIOR INVESTMENT FRAUD.  Because they have built up a lifetime of savings seniors continue to face investment fraud by con artists peddling unsecured promissory notes, viatical settlements and other investments that are either fraudulent or unsuitable for them based on their particular financial needs. In New Jersey, the state Bureau of Securities last year shuttered the operations of an unregistered broker-dealer and his firm for allegedly swindling at least seven elderly women out of more than $360,000 in retirement savings for his personal use and benefit. According to the state’s complaint, some of the victims were cashed out or partially cashed out of annuity of 401(k) accounts without their knowledge or consent. California securities regulators derailed a “living trust mill” scam involving insurance agents acting as investment advisers who mislead and illegally pushed seniors to sell securities and buy annuities. Before doing business with any investment professional, all investors, especially senior investors, should check with their state securities regulator to determine whether the individual is properly licensed and if there have been any complaints or disciplinary problems. For more information, visit NASAA’s Senior Investor Resource Center.

6. HIGH-YIELD INVESTMENTS. A favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to “prime banks.” Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive. In March 2004, Colorado and federal securities regulators broke up aninternational high-yield investment scheme that promised investors monthly returns from 2 percent to 400 percent and defrauded more than 1,000 people in seven countries of approximately $56 million. California regulators in October shut down a prime bank scam promising returns of 15 percent per quarter. For more information, see NASAA’s Investor Alert.

7. INTERNET FRAUD. The Internet is here to stay, and so is Internet investment fraud. Many of the online scams regulators see today are merely new versions of schemes that have been fleecing offline investors for years. For example, regulators have noted an increase on “online boiler room” activity promoting penny or microcap stocks on the Internet. Con artists also are using the Internet to issue and widely distribute bogus news releases to falsely inflate the value of these stocks before cashing out at the expense of unsuspecting investors. For more information see NASAA’s Investor Alert.

8. AFFINITY FRAUD. It is only human nature to trust people who are like you. That’s why con artists often use their victim’s religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud. In May 2004, the California Department of Corporations in 2004 revoked the investment adviser certificate of C+ Capital Management, LLC for defrauding nearly $36 million from investors in an affinity fraud scheme targeting Korean citizens – many elderly. The state’s investigation revealed that Won Charlie Yi owned and operated C+ Capital Management, LLC, and raised nearly $36 million by luring investors from the Korean community to invest money in brokerage accounts he claimed he would set up for them at Carlin Equities Corp., a registered broker-dealer. Investigators determined that Yi not only lied to investors about opening brokerage accounts and other vital investment information, but also deposited most of his clients’ funds into his personal bank account. For more information see NASAA’s Investor Alert.

9. VARIABLE ANNUITY SALES PRACTICES. NASAA members are concerned that variable annuities are being sold to senior investors despite the fact that these products are not suitable investments for most seniors who may need quick access to their money for medical or other emergencies. Regulators also are concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. Securities regulators in Massachusetts filed a complaint against a unit of Citizens Financial Group, accusing the firms of “systematically targeting customers, including many senior citizens” to put their money in variable annuities.

10. OIL & GAS SCAMS. With oil topping $50 per barrel and ongoing instability in the Middle East, NASAA members are concerned that con artists will dust off a variety of oil and gas scams once prevalent in the 1980s to lure investors into unsuitable or fraudulent investments – ranging from leases in oil fields to unproven technologies designed to convert common substances into fuel. Last year, a Virginia couple were indicted for operating an oil-and-gas pyramid scheme that lured investors form Kentucky, Kansas, Texas and other states to invest more than $3 million in wells that never existed. Oregon securities regulators cautioned the state’s investors against a scheme involving the sale of interests in oil and gas wells from a promoter convicted in Colorado on similar charges. In Kansas, a Wichita man was sentenced in 2004 to prison for his role in an oil and gas investment scam that raised over $1 million from 91 investors through telephone sales. The con artist also was ordered to pay restitution to the victims in the amount of $1.63 million. An investigation by the Office of the Kansas Securities Commissioner confirmed that the defendant and his step-father (now deceased) solicited investors for two oil and gas ventures. Investors included an Idaho man who had lost both legs in an industrial accident was looking for a “safe” place to invest $20,000 he received in a liability settlement and a blind man in his 80s from Alabama invested hoping to raise money to care for his wife suffering from Alzheimer’s disease. Investigators discovered that less than 30 percent of the investors’ funds were used for the production of oil or gas. Some investors received checks that were characterized as profits from production although the leases did not produce revenue. The defendants also converted a significant portion of the investors’ funds to their personal use. Arizona regulators believe that a least 100 investors have purchased approximately 2.3 million shares of common stock in Listo, Inc, a company that claimed to be building a resort community in Mexico and developing oil and gas wells in Northeastern Arizona.

For More Information:
Bob Webster
Director of Communications
202-737-0900

2005 Headlines, Newsroom