There’s nothing funny about this “Top 10 List.” State securities regulators have released a list of the “Top 10” investment scams facing the public today. Most of them are familiar to readers of Stock Patrol – ranging from affinity fraud to pyramid schemes. Unfortunately, familiarity has not bred caution; regulators estimate that these fraudulent schemes cost American investors billions of dollars each year.
Many of the victims are older, retired investors looking for safe, predictable investments and interest income. That makes them prime victims for scammers who promise low risks and high returns. But “[t]hat’s an impossible combination,” according to Deborah Bortner, president of the North American Securities Administrators Association (NASAA). As Ms. Bortner points out, “[t]he higher the return, the higher the risk.”
Regulators express concern that securities fraud is “moving out of the boiler room and onto Main Street.” Con artists, who used to rely upon stock brokers now employ licensed life insurance agents to peddle their products. According to Ms. Bortner, while a vast majority of insurance agents look out for the best interests of their clients, “a growing minority, lured by high commissions, are relying solely on marketing claims that are misleading or false.”
So here’s the “Top 10” list, ranked roughly in order of prevalence:
1. Unlicensed individuals, such as life insurance agents, selling securities
Only licensed individuals may sell securities. Don’t do business with someone who is not. To verify that a person is licensed or registered in your state, contact your state securities regulator. (See Regulators On Patrol: Contact the Regulators). If you discover that a person is not licensed, report that individual to your state securities regulator.
2. Affinity Fraud
Many fraudulent schemes target individuals based upon religion, ethnic background or race. As a general rule, we tend to trust people who share our beliefs and background. Scam artists exploit that trust. Regulators point out that no group is immune from those artists who seek to exploit victims for financial gain - from “gifting” programs at some churches to foreign exchange scams targeting Asian-Americans. (See Buyer Be Wary – With Friends Like These; and Regulators On Patrol – Phony Phones).
3. Payphone and ATM sales
Securities regulators recently brought a series of actions charging that 4,500 people living in 25 states and the District of Columbia lost about $76 million from investments in coin-operated pay telephones. Those investors were persuaded to lease payphones for prices ranging from $5,000 to $7,000. They were promised returns of up to 15% on their investment. In reality, few interest payments were made. When they were, regulators found that money from newer investors was occasionally used to make payments to earlier investors – the sign of a classic “Ponzi” scheme. For more on these cases we recommend you read Regulators On Patrol – Phony Phones.
4. Promissory Notes
In this scam, investors are asked to buy short-term debt instruments issued by little known, or non-existent companies. They are promised a high rate of return and little or no risk. In recent years, life insurance agents have been enlisted to make these sales. NASAA cites the example of eighteen elderly Indiana investors who lost $1.4 million in one such scam. The perpetrators, who diverted the money to offshore bank accounts, used the proceeds to purchase expensive cars and for first-class business trips to China, India and Greece.
5. Internet Fraud
Readers of Stock Patrol are far too familiar with this one. Unscrupulous individuals take advantage of the anonymity afforded by the Internet to “pump and dump” thinly traded stocks of dubious value. The Internet is also utilized to peddle phony offshore “prime bank” investments and to publicize pyramid schemes.
6. Ponzi/Pyramid Schemes
These were around long before there was an Internet. In fact, they originated with Charles Ponzi, an Italian immigrant who swindled investors out of $10 million in the early 1900s by promising 40% returns from arbitrage profits on “International Postal Reply Coupons.” These schemes promise high returns, but only the promoters profit consistently. Meanwhile, money from new investors is used to pay off earlier investors and keep them from complaining. Eventually the scheme collapses and investors are left holding an empty bag.
7. “Callable” CDs
No, not the kind that play music. This involves higher-yielding certificates of deposit that will not mature for ten to twenty years unless they are “called” or “redeemed” by the bank. Only the bank can exercise that “call” – not the investor. Early redemption may result in large losses – sometimes totaling as much as 25 percent of the original investment. Regulators point out that one retiree in her 70s invested over $100,000 of her 97 year old mother’s assets in three “callable” CDs with 20 year maturities. She planned to use the money to pay for her mother’s nursing care. Regulators say sellers of these callable CDs often fail to adequately explain the risks and restrictions.
8. Viatical Settlements
The term “Viatical Settlements” refers to interests in the life insurance policies of supposedly terminally ill people. The investor gives the insured person a percentage of the death benefit in cash. In return, investors get to share the death benefit when the insured eventually dies. These investments are considered extremely speculative because of the uncertainties involved in predicting the time of someone’s death. In one twist, Pennsylvania regulators say that something called “senior settlements” – interests in the death benefits of healthy people – are now being sold to investors as well.
9. Prime Bank Schemes
These scams promise triple-digit returns through access to “elite” international banks. Investors are sometimes told they will gain access to the “secret” banking methods used by notable persons of wealth, like the Rothschilds or Saudi royalty.
10. “Get Rich Quick” Seminars
You may find that the only ones getting rich from these “get rich quick” schemes are the people running the seminars. They profit from admission fees and the sale of course materials such as books and tapes. Such seminars are marketed in newspapers, radio and telephone ads, by e-mail and through infomercials. Investors would be well advised to view such offers with a healthy degree of skepticism.
That’s the top “10” – but unfortunately there are always new scams and schemes being used to defraud investors. What would you add to the list? Let us know if you have come across any other securities frauds that may be of interest to our readers.
Mr. Hartley Bernstein represents clients in regulatory and enforcement proceedings. Also, he regularly represents the law firm’s clients in state and federal court proceedings. He previously served as a Trustee of Temple Israel of the City of New York.
Many of the victims are older, retired investors looking for safe, predictable investments and interest income. That makes them prime victims for scammers who promise low risks and high returns. But “[t]hat’s an impossible combination,” according to Deborah Bortner, president of the North American Securities Administrators Association (NASAA). As Ms. Bortner points out, “[t]he higher the return, the higher the risk.”
Regulators express concern that securities fraud is “moving out of the boiler room and onto Main Street.” Con artists, who used to rely upon stock brokers now employ licensed life insurance agents to peddle their products. According to Ms. Bortner, while a vast majority of insurance agents look out for the best interests of their clients, “a growing minority, lured by high commissions, are relying solely on marketing claims that are misleading or false.”
So here’s the “Top 10” list, ranked roughly in order of prevalence:
1. Unlicensed individuals, such as life insurance agents, selling securities
Only licensed individuals may sell securities. Don’t do business with someone who is not. To verify that a person is licensed or registered in your state, contact your state securities regulator. (See Regulators On Patrol: Contact the Regulators). If you discover that a person is not licensed, report that individual to your state securities regulator.
2. Affinity Fraud
Many fraudulent schemes target individuals based upon religion, ethnic background or race. As a general rule, we tend to trust people who share our beliefs and background. Scam artists exploit that trust. Regulators point out that no group is immune from those artists who seek to exploit victims for financial gain - from “gifting” programs at some churches to foreign exchange scams targeting Asian-Americans. (See Buyer Be Wary – With Friends Like These; and Regulators On Patrol – Phony Phones).
3. Payphone and ATM sales
Securities regulators recently brought a series of actions charging that 4,500 people living in 25 states and the District of Columbia lost about $76 million from investments in coin-operated pay telephones. Those investors were persuaded to lease payphones for prices ranging from $5,000 to $7,000. They were promised returns of up to 15% on their investment. In reality, few interest payments were made. When they were, regulators found that money from newer investors was occasionally used to make payments to earlier investors – the sign of a classic “Ponzi” scheme. For more on these cases we recommend you read Regulators On Patrol – Phony Phones.
4. Promissory Notes
In this scam, investors are asked to buy short-term debt instruments issued by little known, or non-existent companies. They are promised a high rate of return and little or no risk. In recent years, life insurance agents have been enlisted to make these sales. NASAA cites the example of eighteen elderly Indiana investors who lost $1.4 million in one such scam. The perpetrators, who diverted the money to offshore bank accounts, used the proceeds to purchase expensive cars and for first-class business trips to China, India and Greece.
5. Internet Fraud
Readers of Stock Patrol are far too familiar with this one. Unscrupulous individuals take advantage of the anonymity afforded by the Internet to “pump and dump” thinly traded stocks of dubious value. The Internet is also utilized to peddle phony offshore “prime bank” investments and to publicize pyramid schemes.
6. Ponzi/Pyramid Schemes
These were around long before there was an Internet. In fact, they originated with Charles Ponzi, an Italian immigrant who swindled investors out of $10 million in the early 1900s by promising 40% returns from arbitrage profits on “International Postal Reply Coupons.” These schemes promise high returns, but only the promoters profit consistently. Meanwhile, money from new investors is used to pay off earlier investors and keep them from complaining. Eventually the scheme collapses and investors are left holding an empty bag.
7. “Callable” CDs
No, not the kind that play music. This involves higher-yielding certificates of deposit that will not mature for ten to twenty years unless they are “called” or “redeemed” by the bank. Only the bank can exercise that “call” – not the investor. Early redemption may result in large losses – sometimes totaling as much as 25 percent of the original investment. Regulators point out that one retiree in her 70s invested over $100,000 of her 97 year old mother’s assets in three “callable” CDs with 20 year maturities. She planned to use the money to pay for her mother’s nursing care. Regulators say sellers of these callable CDs often fail to adequately explain the risks and restrictions.
8. Viatical Settlements
The term “Viatical Settlements” refers to interests in the life insurance policies of supposedly terminally ill people. The investor gives the insured person a percentage of the death benefit in cash. In return, investors get to share the death benefit when the insured eventually dies. These investments are considered extremely speculative because of the uncertainties involved in predicting the time of someone’s death. In one twist, Pennsylvania regulators say that something called “senior settlements” – interests in the death benefits of healthy people – are now being sold to investors as well.
9. Prime Bank Schemes
These scams promise triple-digit returns through access to “elite” international banks. Investors are sometimes told they will gain access to the “secret” banking methods used by notable persons of wealth, like the Rothschilds or Saudi royalty.
10. “Get Rich Quick” Seminars
You may find that the only ones getting rich from these “get rich quick” schemes are the people running the seminars. They profit from admission fees and the sale of course materials such as books and tapes. Such seminars are marketed in newspapers, radio and telephone ads, by e-mail and through infomercials. Investors would be well advised to view such offers with a healthy degree of skepticism.
That’s the top “10” – but unfortunately there are always new scams and schemes being used to defraud investors. What would you add to the list? Let us know if you have come across any other securities frauds that may be of interest to our readers.
Mr. Hartley Bernstein represents clients in regulatory and enforcement proceedings. Also, he regularly represents the law firm’s clients in state and federal court proceedings. He previously served as a Trustee of Temple Israel of the City of New York.
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