Top Investor Scams and Alerts
The North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA has identified the following investment scams causing investor losses. If you believe you were a victim of any of the following scams or have suffered losses caused by these scams contact our office for further information on your rights.
Crowdfunding and Internet Offers.
The 2012 JOBS Act makes significant changes to the methods startup businesses and entrepreneurs may employ to bring their ventures to the investing market, and investors must be wary of the attendant risks. Also, many more rules and mechanisms must be put into place for those changes to actually take effect. For example, the relaxed rules governing registration of relatively small securities deals, public solicitation for private funds, and disclosure of information to investors over the Internet are not yet written. So, the JOBS Act provisions related to crowdfunding, a much-publicized method for startups seeking capital, are not yet available – and will not be until sometime in 2013 – to legitimate businesses. Even when the relaxed rules and registration exemptions are effective, they will not make investments in small businesses less risky – just more prevalent. And the JOBS Act provisions do not eliminate fraud, an unfortunate common feature of Internet securities activity.
Many states and provinces report a recent increase in active investigations or recent enforcement actions involving Internet fraud, and JOBS Act-triggered activity is likely to elongate this trend. Investors must remember that small startups are among the riskiest of investment categories under the best of situations. The crowdfunding and Internet investing marketplaces in North America will develop and undergo major changes in the next year, and investors should monitor this emerging capital formation community with a wary eye.
Inappropriate Advice or Practices from Investment Advisers.The Bernie Madoff case opened a number of eyes and ears to the problems that could exist undetected in an investment advisory firm. Investment advisers are licensed to give specific investment advice and owe their clients a fiduciary duty, unlike brokers that may merely effect suitable securities transactions for their clients. The regulatory environment for investment advisers is shifting, and Madoff has led to increased scrutiny from both state regulators and the U.S. Securities and Exchange Commission. The 2010 Dodd-Frank Act laid the groundwork for a major regulatory shift, transferring thousands of mid-sized investment advisers to primary supervision by state regulators, rather than the SEC. The states have already begun working with these mid-sized investment advisers, assisting them in complying with state registration requirements and applying already robust examination programs.
State enforcement actions increased as well: in 2011, state actions against investment adviser firms nearly doubled over the previous year, and focused both on compliance in the firms’ general business practices and advice to clients. As the states implement regular examination schedules and analyze investment advisers that have not been audited in many years, more problems are likely to be discovered. The increased frequency of exams will benefit investors, however, as state regulators will work to ensure that investors have access to investment advisers who meet their fiduciary duty and cure discovered deficiencies.
Scam Artists Using Self-Directed IRAs to Mask Fraud.
Scam artists, forever on the lookout for new ways to entice investors, are using self-directed IRAs to increase the appeal of their fraudulent schemes. State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to a bogus venture. Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. While a scam artist may suggest that self-directed IRA custodians analyze and validate investments, those custodians only hold the assets in a self-directed IRA and generally do not evaluate the quality or legitimacy of any investment.
Fraudsters also exploit the tax-deferred characteristics of self-directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means. Self-directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities; financial and other information necessary to make a prudent investment decision may not be as readily available for these alternative investments. While self-directed IRAs can be a legitimate way to hold retirement assets, investors should be mindful of potential fraudulent schemes when considering investments for their self-directed IRA. Custodians and trustees of self-directed IRAs may have limited duties to investors, and generally will not evaluate the quality or legitimacy of an investment or its promoters.
EB-5 Investment-for-Visa Schemes.
The Immigrant Investor Program, also known as EB-5, is an immigration program linked to job-creation that is growing in popularity, but investors must beware of promoters who falsely claim that an investment in their venture is safer or guaranteed due to an influx of foreign cash. The EB-5 immigration category is a 20-year-old program that grants a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise (The equivalent Canadian Immigrant Investor Program (IIP), requires a C$800,000 investment). This job-creation effort has attracted investors from around the world, and as with any investment approach, increased interest has been accompanied with new challenges. All investments with an EB-5 component are subject to traditional securities laws, and investors need to be alert to the foreign-funding feature.
Unscrupulous promoters may seek to prop up the plausibility of their scheme by highlighting a connection with a federal jobs program. Similarly, investors may be intrigued by the prospect of big funding from investors in China or other foreign countries with traditional or growing economic power. In a recent case, the developer of a failed artificial sweetener factory planned for a small Missouri town sought Chinese investors through the EB-5 program, and made that a key component in pitching and then selling the underlying government bonds issued for the project. While the existence of Chinese funding may have seemed promising to the city issuing the bonds and the investors who bought them, the developer defaulted on the first bond payment, leaving the city and investors out millions of dollars. Investors considering any enterprise with an EB-5 or IIP feature should make sure to obtain full information on every component of the venture, including all funding sources and the background of all promoters.
•Exchange-Traded Funds (ETFs).
While ETFs resemble mutual funds in many respects, some, such as leveraged and inverse ETFs, may contain hidden traps and complexities, and may consist of highly leveraged bundles of exotic financial instruments, including options and other derivatives. Given their potential for volatility, leveraged ETFs may not be suitable for most retail investors. These types of ETFs are primarily designed for short-term trading (such as day-trading), and not for buy-and-hold strategies. Also be aware that some ETFs are thinly traded and may not always be liquid.
•Foreign Exchange Trading Schemes.
Currency trading and foreign exchange (forex) trading schemes can be particularly harmful to unsuspecting investors. 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 some instances, salesmen and promoters who claim to have complex algorithms or propriety software programs which allow them to beat the market are actually just running Ponzi schemes. Too often, state regulators have encountered situations where there are no trades; the money is simply stolen.
•Gold and Precious Metals.
High gold prices have trapped some investors in gold bullion scams in which a seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor when it gains in value. In many instances the gold does not exist. Investors have also been harmed by promoters pitching investment pools in precious metal commodities and gold mines.
Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers alike. Scammers also exploit headlines to cash in on unsuspecting investors, whether from investments related to the clean-up of the Gulf of Mexico oil spill or the rising national interest in environmental innovations tied to “clean” energy, such as wind energy, wave energy, carbon credits and other alternative energy financing.
•Oil & Gas Schemes.
Regardless of the price at the pump, fraudulent energy promoters continue to capitalize both on interest in the commodity and on oil and gas as investment alternatives to the stock market. Oil and gas investments tend to be highly risky and unsuitable for traditional, smaller investors who cannot afford the risk. Securities investments offering profit participation in oil and gas ventures can be legitimate, but even when the underlying project is genuine, any revenues realized can be absorbed by high sales commissions paid to the promoter and dubious “expenses” skimmed off by the managing partner. Some promoters, many of whom have had past run-ins with regulators, have attempted to structure their “joint ventures” or “general partnerships” to avoid securities regulation and deprive investors of important protections.
Scam artists have found it lucrative to abuse membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Typical affinity groups include religious, ethnic, professional, educational, language, age and any other group with shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation, investors should seek further information about the investment from an unbiased, independent source, and review both the promises and risks.
•Undisclosed Conflicts of Interest.
When obtaining investment advice about securities, investors need to know that not all advice is given with their best interest at heart. Some salespeople can receive lucrative commissions when they sell a product that is risky or inappropriate for an investor, but don’t have to disclose that financial incentive. Investors should demand that anyone giving advice or recommendations disclose how they are compensated.
•Private or Special Deals.
Some investors encounter investment opportunities or deals couched as “private” or only for “special” clients. While securities laws do offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors in a non-public offering, these securities are not subject to the same review as others. Many state securities regulators have seen continued or increased abuse of fraudulent private offerings made under federal exemptions or not regulated at all. Although properly used by many legitimate issuers, private offerings have become an attractive option for con artists looking to steal money from investors by promoting the special or private nature of these schemes and by making false and misleading representations.
•“Off the Books” Deals.
“Off the books” sales are an increasingly common threat to investors. Be cautious if your broker offers an investment on the side instead of one sold through his or her employer. These “off books” investments may not only be illegal, but they can also be especially risky without the oversight and supervision of the broker’s employer.
•Unsolicited Online Pitches.
Promoters of fraudulent investment schemes are moving beyond e-mail and turning to social media and online communities, such as Facebook, Twitter, Craigslist and YouTube to solicit unsuspecting investors. Some may use these sites to spread misinformation to artificially inflate the value of stock before selling in a “pump and dump” scheme. Others may promise high-yield, tax-free returns from investments in offshore markets. Once the money is sent to another country and is in someone else’s control, investors may not be able to get it back. In many cases, these offers turn out to be Ponzi schemes. Investors should approach any unsolicited investment opportunity with suspicion.
The recent investigations by state securities regulators related to auction-rate securities (ARS) have reinforced that investors should remain cautious when pitched complex investment products accompanied by deficient disclosures or when advised to concentrate their investments too heavily in one investment product. It is best to avoid investment pitches that would lead you to put all of your eggs in one basket, especially if it’s a basket you don’t fully understand.
The substantial increase in energy costs has made scams related to energy more prevalent. State and provincial securities regulators are seeing not only shady oil and gas investments, but also scams that promise the development of new technologies to increase the efficiency of energy consumption or to extract energy from sources previously thought too expensive to develop.
Online Affinity Fraud
In a new twist on affinity and online investment fraud, Tyler said NASAA members are concerned that unscrupulous individuals are trying to use social networking websites to lure people to meetings that may promote fraudulent or unsuitable investment products. “Social networking websites create an environment ripe for affinity fraud,” Tyler said. “Fraudsters can take advantage of the fact people freely share information with both their real and ‘virtual’ friends by posting it to their profile,” Tyler said. “Communication tools provided by some social networking websites make it easy to advertise and promote investment scams to a wide audience for free.” Investors need to do their own research before making an investment and should not simply rely on ‘expert’ advice given at a seminar or meeting.
Prime Bank Schemes
Promises of receipt of astronomical profits from vehicles that execute “off-shore trades of foreign bank debentures” only available to very wealthy people and cloaked in secrecy are the securities equivalent of a purse snatch. They simply do not exist, and once money is handed over, it will never be recovered.
Private Securities Offerings
Con artists are turning increasingly to private securities offerings under Rule 506 Regulation D of the Securities Act of 1933 to attract investors without having to go through the full registration process. Although sometimes legitimate, these offerings are often associated with fraud. Also, proceed with caution when encouraged to invest in “general partnership” or “limited liability companies.” Speculative deals often are packaged as such in an attempt to evade the consumer protection requirements of state and federal securities laws. Case Example >>
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. 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.
Pump and Dump Schemes
E-mail and fax spam, phony press releases and telemarketing drives are the tools of fraudsters who “pump” up the value of low priced securities traded on the “pink” sheets which are then “dumped” on naïve investors who purchase the stock at inflated prices. The balloon breaks when the promoters no longer maintain the myth that there is value in the shares and investors are left holding worthless stock certificates.
Real Estate Investment Schemes
As the housing market continues to reel from the subprime lending crisis, schemes promising large returns from various types of real estate-related investments also are increasing. Some real estate alternatives may actually be worthless real estate investments that promoters are trying to dump off to unsuspecting retail investors. State and provincial securities regulators also note that "reverse mortgages" pose several risks: they may not be appropriate for a given investor; if the homeowner chooses the option of accepting the funds all at once in a lump sum it may create a sudden supply of cash that may be diverted into other bad investments; and they enable promoters to gain access to a senior citizen’s entire financial profile. Such disclosure of other assets can lead to yet more scams—and losses.
Sale and Leaseback Contracts
Seeking to avoid protections afforded under federal and state securities laws, investments in equipment or animals are proposed to investors with the promise of a high returns and a guaranteed future repurchase of the product at full invested price. While these investments are touted as safe, the buyback features are unfunded and illusory.
State and provincial securities regulators continue to see the sale of complex hybrid financial products, such as variable and equity-indexed annuities, to investors for whom they are not suitable—typically seniors. These products frequently contain features so complicated that even licensed financial professionals are not adequately trained to understand them.
If you believe you are a victim of any of the above scams and wrongful conduct contact a Securities lawyer at The Law Office of Eric Norstedt P.A.to discuss your rights.