American Greed

Top 10 Investor Traps

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Top 10 Investor Traps

It’s easy to become a victim of an investor scam, as news headlines have shown for the past two years.  Criminals follow the latest market trends and find weaknesses to lure victims.  According to the , senior citizens are the No. 1 target for fraud, while baby boomers are second.  In 2008, the FBI estimated $40 billion was lost to securities and commodities fraud.So how can you protect yourself from being scammed? Click ahead to see which investment vehicles are ranked high for fraud and get ti
Source: North American Securties Administrator Association (NASAA)

It’s easy to become a victim of an investor scam, as news headlines have shown for the past two years.  Criminals follow the latest market trends and find weaknesses to lure victims.  According to the North American Securities Administrator Association (NASAA), senior citizens are the No. 1 target for fraud, while baby boomers are second.  In 2008, the FBI estimated $40 billion was lost to securities and commodities fraud.

So how can you protect yourself from being scammed? Click ahead to see which investment vehicles are ranked high for fraud and get tips on making sure it doesn't happen to you.

Produced by Tonya Alexander
Posted: 2010 Apr 7

10. Leveraged Exchange-Traded Funds (ETFs) 

Leveraged exchange-traded funds (ETFs) are a relatively new financial product, which is why investors may not be aware of the risks they carry. The funds, which trade throughout the day like a stock, use exotic financial instruments like options and other derivatives to generate better returns than the as the value of the underlying assets rise or fall. Given their volatility, these funds typically are not suitable for most retail investors.
Source: North American Securties Administrator Association (NASAA)Photo: Oliver Quillia for CNBC.com

Leveraged exchange-traded funds (ETFs) are a relatively new financial product, which is why investors may not be aware of the risks they carry. The funds, which trade throughout the day like a stock, use exotic financial instruments, including options, other derivatives and promise the potential to generate better returns than the market return. Given their volatility, these funds typically are not suitable for most retail investors.

9. 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.
Source: North American Securties Administrator Association (NASAA)Photo: Istock

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.

Click to see Case Example

8. 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 the insurance companies generally are located outside of the United States, are not licensed to do business in the United States, and lack the resources necessary to deliver on the promised guarantees.Unlike publicly advertised promissory notes, promoters of these short-term notes usually attem
Source: North American Securties Administrator Association (NASAA)Photo: Istock

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 the insurance companies generally are located outside of the United States, are not licensed to do business in the United States, and lack the resources necessary to deliver on the promised guarantees.

Unlike publicly advertised promissory notes, promoters of these short-term 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.

Click to see Investor Tip

7. Entertainment Investments

Entertainment investments are unregistered investments.  They encompass a variety of products including movies, infomercials, internet gambling and pornography sites, and promise high returns while offering little disclosure of risk.
Source: North American Securties Administrator Association (NASAA)Photo: Gregor Schuster | Photographer's Choice | Getty Images

Entertainment investments are unregistered investments.  They encompass a variety of products including movies, infomercials, internet gambling and pornography sites, and promise high returns while offering little disclosure of risk.

Click to see Case Example

6. Real Estate Investment Schemes

NASAA members 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 only generate a quick profit for the con artist and provide no benefit to the consumer.Some homeowners, particularly seniors, may be attracted to reverse mortgages, which are a legitimate lending option. However, the resulting lump sum home equity paym
Source: North American Securities Administrator Association (NASAA)Photo: Getty Images

NASAA members 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 only generate a quick profit for the con artist and provide no benefit to the consumer.

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. 

Click to see actual Case Example

5. Private Placement Offerings

State securities regulators have observed a steady and significant rise in the number of 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 optio
Source: North American Securties Administrator Association (NASAA)Photo: Jupiterimages |  Workbook Stock | Getty Images

State securities regulators have observed a steady and significant rise in the number of 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 money from investors through false and misleading representations.

Click to see Case Example

4. Life Settlements

Life Settlements have been a concern for state securities regulators.  The rising popularity of these products among investors has prompted a recent congressional investigation. While life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits come at a high price for investors, particularly senior citizens.  Wide-ranging fraudulent practices in the life settlement market include Ponzi schemes; fraudulent life expectancy evalua
Source: North American Securties Administrator Association (NASAA)Photo: Andrew Bret Wallis | Photographer's Choice|Getty Images

Life Settlements have been a concern for state securities regulators.  The rising popularity of these products among investors has prompted a recent congressional investigation. While life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits come at a high price for investors, particularly senior citizens. 

Wide-ranging fraudulent practices in the life settlement market include Ponzi schemes; fraudulent life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk.
Click to see Case Example

3. Natural Resource Investments

The NASAA expects to continue to see a rise in energy and precious-metals scams promising quick, high returns. Investors anxious to recover losses quickly likely will be hooked 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.
Source: North American Securties Administrator Association (NASAA)

The NASAA expects to continue to see a rise in energy and precious-metals scams promising quick, high returns. Investors anxious to recover losses quickly likely will be hooked 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.

Click to see Case Example

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.There are a lot of similar foreign- exchange (forex) trading schemes. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment
Source: North American Securties Administrator Association (NASAA)Photo: Gazimal|Iconica | Getty Images

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.

There are a lot of similar foreign- exchange (forex) trading schemes. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment strategies assuming that trades are actually made. In many instances there are no trades; the money is simply stolen.

Click to see an Advisory

1. Ponzi Schemes

Ponzi Schemes rank number one as investment frauds.  Following Bernard Madoff’s multi-billion 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.While some Ponzi investors may have a slight chance of realizing a return on their investment, most investors have from the outs
Source: North American Securties Administrator Association (NASAA)Photo: Getty Images

Ponzi Schemes rank Number One in investment fraud.  Following Bernard Madoff’s multi-billion 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 contributed by later investors, who end up losing all or most of their money to the promoter.

While some Ponzi investors may have a slight chance of realizing a return on their investment, most investors have from the outset no hope of recovery.

Read more about Bernard Madoff

How to Prevent Fraud

Denise Voight Crawford, president of the NASAA and Texas Securities Commissioner, says, “The way to protect yourself from affinity fraud is to investigate before you invest.”  First you should find your state securities regulator on NASAA.org, contact them with the name of the person that asked you to investment and give them the name of the offering. The red flags for fraud are being promised a high rate or consistent rate of return on securities that aren’t registered in your state, and also i
Source: North American Securties Administrator Association (NASAA)

Denise Voight Crawford, president of the NASAA and Texas Securities Commissioner, says, “The way to protect yourself from affinity fraud is to investigate before you invest.”  First you should find your state securities regulator on NASAA.org, contact them with the name of the person that asked you to invest and give them the name of the offering.

The red flags for fraud are being promised a high rate or consistent rate of return on securities that aren’t registered in your state, and also if the person is not properly licensed.

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