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Investment scams


Bogus "opportunities" are rampant. Here are some common ones, and how you can avoid becoming a victim.


Investment scams

Bogus "opportunities" are rampant. Here are some common ones, and how you can avoid becoming a victim.

By Leslie Kane
Senior Editor

sucker may be born every minute, but shady investment deals usually come dressed in a pinstripe suit rather than in a carnival barker's straw boater. "Investment scams have been on the rise," says Jerry Munk, public affairs spokesman with the North American Securities Administrators Association in Washington, DC. "People of every profession are being fooled, and they end up losing money." Sometimes a lot of money.

The increase in scams is partly due to the struggling stock market and low interest rates, says Daniel G. Lord, director of education and public affairs with the Alabama Securities Commission, in Montgomery. People are simply more susceptible to deals that promise high returns with little risk.

The do-it-yourself investment movement is also a factor, he adds. "Years ago, individuals didn't handle their own finances. Now, many people do, but they don't know what to look for or how to evaluate a potential investment."

Swindlers take full advantage of their ignorance. Many create expensive ads and brochures, complete with phony performance data. "One company ran television commercials during a national football game," Lord says. "The bigger the lie, the more easily people will accept it."

To safeguard your savings, be wary of deals like these:

Fake promissory notes. These are short-term debt instruments often issued by little-known or nonexistent companies, says Lord. Bogus promissory notes that supposedly represent interests in mortgages are popular. Sellers claim the notes will bring extraordinarily high returns with little risk.

Baloney, says Lord. "The action on these notes often operates like a Ponzi scheme," he says. "The sellers keep taking in money from new investors and use a small portion of that to pay 'interest' to earlier investors. They continue selling notes and keep most of the money themselves. Eventually they run out of money or take off with what they have."

Independent insurance agents are sometimes guilty of selling fake promissory notes, says Lord. Often, the agents themselves don't know the investments are shams.

Last summer, four Georgia con men recruited independent insurance agents to sell millions of dollars worth of bogus promissory notes, guaranteeing nine-month returns of up to 21 percent. Half of each investment funded commissions to company principals and sales agents. The ringleader had scammed more than $150 million from investors nationwide.

Charitable gift annuities. In a legitimate transaction, investors transfer a lump sum of cash or a property to a charitable organization. In return they receive a guaranteed stream of income, as well as a tax deduction for the donation. But sometimes scam artists create a bogus foundation with a respectable-seeming front person to lure unwary investors. "They choose a magnanimous-sounding name, like The Worldwide Charity and Benevolence Foundation," says Lord. "But the organization has no money to back its financial obligations. They take investors' cash and promise to pay them income over time."

In 2001, a fake Arizona-based charity called the Mid-America Foundation sold charitable gift annuities through accountants, independent insurance agents, and financial planners. Before he was caught, its founder used the money to buy three homes, a ranch, pay child support, and rack up gambling debts.

Sometimes the charity is real but the "annuity" is a Ponzi scheme, says Lord. The payments last only as long as the founders can find and fool new investors so they can make payments to the original investors.

Oil and gas schemes. Many oil and gas partnerships are legitimate, and reputable financial advisers often recommend them to diversify their clients' portfolios. But that doesn't stop charlatans from selling interests in wells that are drier than a mummy's tomb.

Last June, for example, securities regulators in Arkansas forced two companies that were promoting a "can't lose" natural gas well to halt their marketing activities. In truth, the well was a nonproducer. Neither the founders of the companies nor the securities they hawked were registered with the Arkansas Securities Department.

Bogus oil and gas partnerships tend to flourish when headlines predict oil shortages or a rise in natural gas prices.

Equipment leasing. Earn monthly income by owning a share in a pay phone, ATM, or Internet kiosk! That's the lure of equipment leasing arrangements, which have gained popularity as alternative investments.

Many of these businesses are legitimate, and some have paid handsomely. But numerous scams have also cropped up, says Lord. "In some cases, the equipment didn't exist. In others, the sellers did own a pay phone or ATM, but they misrepresented the risks and potential returns. They claimed that the investment would be far more profitable than it could actually be. Investors didn't know what they were getting into."

Unscrupulous brokers. Today, it's no shock that some brokers push lame securities or encourage buying and selling to earn commissions. And since the stock market's decline, some have tried to boost their income by cutting corners, making unauthorized trades, or slapping unexplained fees onto an account. Shady brokers might also make unsuitable recommendations, such as risky options contracts, says Lord.

"When your broker makes recommendations, take notes," urges Lord. "You should have time to think, rather than being pressured to make a quick decision, and you should have all your questions answered about an investment's risks and potential rewards."

To protect yourself from fraudulent deals, make sure any investment you're considering is registered with your state's securities regulator, and that the broker or dealer is also registered and licensed to sell that sort of investment. You can contact your state's securities regulator through the North American Securities Administrators Association (www.nasaa.org).

"Through the NASAA's main Web site, you can link directly to your state's NASAA arm and verify whether the investment and the professional are registered," says Lord. "You can also see whether any investors have lodged complaints against the broker. If the broker isn't registered, the investment isn't, or neither is, it could be a cause for alarm." Before investing, get a second opinion from another financial professional.


Leslie Kane. Investment scams. Medical Economics Jun. 6, 2003;80:73.

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