Top Investor Threats

Cryptocurrencies burst onto the investing mainstream in 2017 as the values of some virtual coins and tokens skyrocketed, led by Bitcoin and Etherium. Shortly after, the news featured coverage of new cryptocurrencies, coin exchanges, and related investment products. Stories of “crypto millionaires” attracted some investors to try their hand at investing in cryptocurrencies or crypto-related investments. But stories of those who bet big and lost also began appearing and they continue to appear.

Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds. And because these products do not fall neatly into the existing federal/state regulatory framework, it may be easier for the promoters of these products to fleece you. Investing in cryptocurrencies and related financial products accordingly should be seen for what it is: extremely risky speculation with a high risk of loss.

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In an environment of low interest rates, the promise of high interest promissory notes may tempt investors, especially seniors and others living on a fixed income.

A promissory note is a written promise to pay (or repay) a specified sum of money at a stated time in the future or upon demand. Promissory notes generally pay interest, either periodically before maturity of the note or at the time of maturity. Companies may sell promissory notes to raise capital, and usually offer them only to sophisticated or institutional investors. But not all promissory notes are sold in this way.

Promissory notes may be offered and sold to retail investors. Such notes must be registered with the Securities and Exchange Commission and/or the state(s) in which they are sold or qualify for an exemption from securities registration. Most promissory notes sold to the general public also must be sold by securities salespeople who have the appropriate securities license or registration from their state securities agency.

Promissory notes from legitimate issuers can provide reasonable investment returns at an acceptable level of risk, although state securities regulators have identified an unfortunately high number of promissory note frauds. Individuals considering investing in a promissory note should thoroughly research the investment – and the people promoting it. Investors should be cautious about promissory notes with durations of nine months or less, as these notes generally do not require federal or state securities registration.

Such short-term notes have been the source of most (though not all) of the fraudulent activity involving promissory notes identified by state securities regulators. These short-term debt instruments may be offered by little-known (or perhaps even nonexistent) companies and extend promises of high returns – perhaps over 15 percent monthly – at little to no risk. But if an investment sounds too good to be true, it probably is.

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Social networking through the internet allows people to connect to one another more quickly and easily than ever before. Investment promoters increasingly are logging on to find investors … and their money.

A social network is a group of individuals (or organizations) who are connected through common interests, hobbies, lifestyles, relationships, faith or other beliefs. Platforms such as Facebook, Twitter, LinkedIn, eHarmony and other online social networks and communities have made it faster and easier for users to meet, interact and establish connections with other users anywhere in the world.

While social networking helps connect people with others who share similar interests or views, con artists infiltrate these social networks looking for victims. By joining and actively participating in a social network or community, the con artist builds credibility and gains the trust of other members of the group.

In online social networks, a con artist can establish this trust and credibility more quickly. The scammer has immediate access to potential victims through their online profiles, which may contain sensitive personal information such as their dates or places of birth, phone numbers, home addresses, religious and political views, employment histories, and even personal photographs.

The con artist takes advantage of how easily people share background and personal information online and uses it to make a skillful and highly targeted pitch. The scam can spread rapidly through a social network as the con artist gains access to the friends and colleagues of the initial target.

Online investment fraud has many of the same characteristics as offline investment fraud. Learn to recognize these red flags:

• Promises of high returns with no risk. Many online scams promise unreasonably high short-term profits. Guarantees of returns around 2 percent a day, 14 percent a week or 40 percent a month are too good to be true. Remember that risk and reward go hand-in-hand.
• Offshore operations. Many scams are headquartered offshore, making it more difficult for regulators to shut down the scam and recover investors’ funds.
• E-Currency sites. If you have to open an e-currency account to transfer money, use caution. These sites may not be regulated, and the con artists use them to cover up the money trail.
• Recruit your friends. Most cons will offer bonuses if you recruit your friends into the scheme.
• Professional websites with little to no information. These days anyone can put up a website. Scam sites may look professional, but they offer little to no information about the company’s management, location or details about the investment.
• No written information. Online scam promoters often fail to provide a prospectus or other form of written information detailing the risks of the investment and procedures to get your money out.

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While self-directed IRAs can be a safe way to invest retirement funds, investors should understand that third-party custodians have limited duties to investors.

Since the mid-1970s, investors have taken advantage of a provision in the tax code allowing them to contribute money on a tax-deferred basis to an individual retirement account, popularly referred to as an IRA.

To open an IRA account, the investor must find an Internal Revenue Service (IRS)-approved company to act as the account’s custodian. Investors open and deposit funds into the account and may invest in opportunities available through the company. A self-directed IRA means you, the customer, have complete decision-making power on your investments in the IRA. Unlike a stock, bond or mutual fund, where others either manage or control the investment, you are in total control of calling the shots.

Occasionally, an investor is approached by a promoter offering an investment opportunity not available through the company that holds the investor’s IRA. The promoter directs the investor to transfer funds from the original IRA to a new third-party custodian to facilitate the transaction. A third-party custodian is a company that keeps track of the IRA and completes the required reporting to the IRS in order to keep the money in a tax-deferred status.

Schemes involving self-directed IRAs often target senior citizens and retirees. State regulators have brought several very recent multi-state actions against parties leveraging the purported legitimacy provided by SDIRAs to defraud the public, including the case brought jointly by 30 states and the CFTC against several Los Angeles precious metals dealers.  That case alone involved approximately $185 million and 1,600 mostly elderly investors – including more than $140 million that came straight from retirement accounts.

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