Top Ten List of Investment Scams, Schemes and Scandals

The new ranking of scams, schemes, and scandals is based on a survey of state securities regulators conducted by the North American Securities Administrators Association (NASAA). The list is based on the order of prevalence and seriousness as identified by state securities regulators: 1) Ponzi Schemes, 2) Senior Investment Fraud, 3) Promissory Notes, 4) Unscrupulous Broker/Dealer Representatives, 5) Affinity Fraud, 6) Insurance Agent Securities Fraud, 7) Prime Bank/High-Yield Investment Schemes, 8) Internet Fraud, 9) Mutual Fund Business Practices, 10) Variable Annuity Misrepresentations.

"“Our fight against fraud never stops,”" said Biggs. "“Each year, con artists discover new ways to cheat people out of their hard-earned savings, often just by repackaging the old tried-and-true scams. The list is based on a national survey but we’ve seen all of these tactics used against Kansas investors.”"

"“Common sense tells you that if something sounds too good to be true it almost always is. You don’t have to rely on common sense alone,”" Biggs said. "“Education and awareness are an investor’s best defense against fraud.”"

Before you buy into an investment, contact the Securities Commissioner to make sure that the broker or salesperson is licensed to sell securities and that the investment itself has been registered for sale in Kansas. "“Protect your nest egg,”" Biggs said. "“Take time to check out the salesperson and the company before you surrender any money. If either has a history of dishonest practices, don’t invest. If you feel like you’ve been defrauded, report it to our office immediately.”"

1. Ponzi Schemes. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. “Satisfied” investors may even recruit new investors into the scheme but eventually the scheme collapses.
2. Senior Fraud. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior investors. Older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns. To learn more, visit NASAA’s Senior Investor Resource Center at http://www.nasaa.org/nasaa/sirc/sirc.asp.
3. Promissory Notes. A long-time member of the Top 10 list, these short-term debt instruments often are sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. When interest rates are low, investors often are lured 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.
4. Unscrupulous Brokers. Despite the stock market’s rebound in 2003, state securities regulators are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. “I give credit to the increasing numbers of investors who are giving their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities,” Biggs said.
5. Affinity Fraud. Con artists know that it is only human nature to trust people who are like you. That’s why scammers 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.
6. Insurance Agents and Other Unlicensed Securities Sellers. While most independent insurance agents are honest professionals, too many are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. “Scam artists continue to entice independent insurance agents into selling investments they may know little about,” Biggs said. The person running the scam instructs the independent sales force – usually insurance agents but sometimes investment advisers and accountants – to promise high returns with little or no risk.
7. Prime Bank Schemes. Also known as “risk free guaranteed high yield instruments” or something equally deceptive, con artists promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. "“Simply put, neither prime banks nor the instruments they claim to trade exist,"" said Biggs. ""People want to believe there are easy ways to make fabulous amounts of money.”"
8. Internet Fraud. It should come as no surprise that Internet fraud has become a booming business. "“Many of the online scams regulators see today are merely electronic versions of old schemes. The Internet allows con artists to cast a wider net,”" Biggs said. Biggs also warned investors to ignore e-mail offers from individuals representing themselves as foreign government or business officials in need of help to deposit large sums of money in overseas bank accounts. "“Don’t be dot.conned. If you get an e-mail pitching a deal like this, hit delete,”" he cautioned.
9. Mutual Fund Business Practices. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators. "“These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders,”" Biggs said. "“We will continue to actively pursue inquiries into mutual fund improprieties and are committed to aggressively addressing mutual fund complaints raised by investors in our jurisdiction,”" he added.
10. Variable Annuity Misrepresentation. Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators 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. The benefits of variable annuities – tax-deferral, death benefits among others – come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees. "“Variable annuities make sense only for consumers willing to invest for extended periods, but they are not suitable for many retirees who cannot afford to lock up their money for a long time,”" Biggs said.

Biggs cautioned investors that scams are often bundled. "“Many of these tactics are used simultaneously to defraud investors. If you notice one red flag, there are probably others behind the scenes. If you have any suspicions, contact our agency immediately.”"