Common Investment Scams

Investment Seminars and Financial Planning Activity
Scam Artists use investment seminars and pose as financial planners offering appealing and farfetched investment advice to the unsuspecting investor. Much of the advice they give during these seminars may require them to be licensed or registered, and they may fail to disclose conflicts of interest, as well as hidden fees and commissions. The extra fees or phony investment opportunities are usually not discovered by the investor until it is too late.

A contract written by a life insurance company to provide continuing income for a specified amount of time. Payments are generally made on a monthly basis or in periodic installments, in most cases to supplement retirement income. Investors are often induced into buying annuities that are unsuitable, misguided and inappropriate for their situations. Because annuities can be a vital form of financial protection for seniors, the misleading and ill-advised information given to them can be devastating.

Illegal securities Offered as Individual Retirement Account (IRA) Investments
Increasingly, unscrupulous self-directed IRA custodians are offering to hold unlawful and fraudulent securities in IRA accounts. When the fraudulent or illegal nature of the securities becomes clear, investors may not only lose their entire investments, but may be faced with additional IRS and administrative penalties as well. Many investors believe that just because an investment is being held in an IRA account, it is safe and legal. Investors must ensure that the investment is properly registered and is being offered by a properly licensed salesperson'
Whenever a promoter accepts IRA money there is an imputed credibility to the deal. People wrongly assume that if retirement money can legally be deposited in a certain deal, then that deal must have been "checked out by the IRS and blessed as legitimate."

"Callable" CD's
These higher-yielding certificates of deposit won't mature for 10-20 years: unless the bank, not the investor, "calls" or redeems them. Redeeming the CD early may result in large losses -- upwards of 25% of the original investment. Sellers of callable CDs often don't adequately disclose such risks and restrictions to investors.

Promissory Notes
Promissory Note scams offer investors a promise of high returns at low risk. They are often sold by independent insurance agents. Many of the notes are short-term debt instruments issued on behalf of a fraudulent institution or companies that don't exist, each promising high returns upwards of 15% monthly -- with little or no risk, typically with a maturity of 9 months.

Predatory Lending
Predatory lending consists of a variety of home mortgage lending practices, where predatory lenders will pressure consumers into signing loan agreements that are not in the consumers best interest or that they cannot afford. The scam artist may use a combination of false promises and deceptive sales practices to convince the borrower to commit before they are able to have full knowledge of the agreement.

Prime Bank Schemes
Scam artists promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. Users of these types of schemes often target conspiracy theorists, promising access to "secret" investments used by the Rothchilds or Saudi royalty.

Internet Fraud
The Internet's wide reach and supposed anonymity are two attractive features for scam artists. They use the Internet for a wide variety of scams including pyramid schemes; promotion of bogus "prime bank" investments; and enhancing the sale of thinly traded stocks. The Attorney General urges investors to ignore anonymous financial advice on the Internet, via e-mail or advertisements.

Affinity Group Fraud
Affinity fraud occurs when scam artists use their victim's religious or ethnic identity to gain their trust, knowing that it's human nature to trust people who are like you. Advertising in the media that serves specific ethnic groups is used to identity potential victims, often with offers of employment, training or financial advice. Often, however, the scheme is perpetuated by simple word of mouth.

Ponzi/Pyramid Schemes
Ponzi schemes are swindles in which tremendous rates of returns are paid to initial investors out of funds from later investors, who end up losing all of their money when the house of cards falls down. A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all emphasis on bringing in new members/investors and not on selling the product or service.

Common elements of a pyramid scheme:

  • An invitation from a friend, neighbor, or co-worker to attend an "opportunity meeting"
  • A well-rehearsed presentation that offers an exciting shortcut to wealth and adventure
  • Hefty fees for products, courses, etc., or for the right to recruit others and profits from their participation
  • An emphasis on recruiting others to keep the pyramid growing.

Viatical Investment Scams
Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in the final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker. These investments are extremely high risk, particularly for seniors.

Boiler Rooms
Named after the rented office spaces they use to "turn the heat up" on potential investors, these fly-by-night operations rely on "cold calls" and fast talking to make their sales. Boiler rooms are great vehicles for scammers because it is often difficult to distinguish scams from a legitimate developmental business. Warning signs that you may be the target of a boiler room schemes include:

  • strangers calling you from another state trying to sell you unfamiliar investments;
  • vague and automatic responses to all of your questions;
  • refusal to disclose the street address of the office, instead referring potential customers to drop boxes; and
  • high pressure sales tactics, such as claiming that the opportunity will vanish if you don't invest immediately

Precious Metals Deals
Precious metals have always attracted investors. Such tangibles as gold and silver seem particularly appealing to investors during uncertain times. Con artists urge jittery investors to put their savings into something they can hold on to rather than paper investments such as stocks and 55 bonds. There are several examples of precious metals schemes:

Coin Swindles
So called "rare coins" are often sold to unwary investors who are led to believe that they are a good investment that will increase in value over the years. Representations made about the expected increase in the value of these coins are almost always untrue and part of a scam perpetrated against unsophisticated, often elderly victims. Such scams are conducted out of "boiler rooms" from which unscrupulous salespeople with no expertise in the coin market make hundreds of unsolicited phone calls to people whose names appear on so-called "sucker lists."

The salespeople use high-pressure sales tactics and convey a sense of urgency about closing the deal. They also misrepresent the value of the coin, its scarcity and where it was obtained. For example, a victim may be misled into believing that the coins were recently obtained through an exclusive estate sale and are in very short supply. A common tactic used by these scamsters is to falsely promise to rebroker or resell the coins to another investor for a profit so that the victim is led to believe that he or she cannot lose money. Often, these coins are delivered in poor condition or are never sent at all.

Gold mining schemes
How does gold, silver or platinum at dirt-cheap prices sound? That is the promise of swindlers who claim to be able to sell precious metals directly from mines. They claim that a new technology will be used to recover trace amounts that other firms have not been able to retrieve.

Bullion deals
How can swindlers avoid delivering when they promise gold bars? One popular stalling tactic: They offer bullion storage services where a consumer supposedly buys precious metals in bullion form and then has them stored in a vault. This is an open invitation to fraud. In one major scam, con artists simply pocketed millions of dollars of investor
funds and never bought gold.

Stock swindles- -Pump and Dump Schemes
Swindlers tout a company's stock (typically cheap stock -- less than $5) through false and misleading statements to the marketplace. Usually a small group of informed people buy a stock before they recommend it to thousands of investors. They may claim that a company has developed a cure for AIDS or is about to announce a huge business deal that will cause its stock to double or triple in value. The result is a quick spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock early sell-off when the price peaks at a huge profit. Most pump-and-dump schemes recommend small companies which are more volatile making it easier to manipulate a stock because there's little or no information available about the company. After pumping up the stock, fraudsters make huge profits by dealing their cheap stock on the market. The remaining shares can become worthless.

A recent variation on this scheme is that messages are left on telephone answering machines misleading the recipient of the call into believing that he or she is accidentally overhearing a message telling a third party about a "tip" on a stock. The same is being done with faxes which are meant to appear as if they had been sent to the wrong party. Apparently people fall for this trick, perhaps because they think they are getting something for nothing.

Phony International Investments
With the strong performance of many foreign stock markets, many American consumers are investing some of their funds abroad. Con artists have responded by offering scams with an international flair. In one case, con artist fleeced 400 investors out of $7 million by promising 30 to 40 percent returns on certificates of deposit and other investments through a bank in the Marshall Islands. In fact, the bank existed only on paper and its sole officer was a Marshall Islands gas station attendant who picked investors' checks and mailed them back to the con artist. Even when U.S. investors deal with legitimate investment opportunities overseas, they remain vulnerable to such factors as loose or nonexistent investor protection regulation, currency fluctuations, limited opportunities to pursue grievances and political instability in some nations. Smart investors will exercise extreme caution before putting money into any foreign investment.

Bogus Franchise and Business Opportunities
The dream of being your own boss is the primary appeal of franchises and business opportunities. Con artists realize that the desire of many Americans to own their own business may make them less cautious when it comes to evaluating franchises and business opportunity deals. Such investments may be promoted on the basis of the fear of losing a job or general uneasiness about the economic situation.

Ads for fraudulent business opportunity schemes may appear in otherwise reputable television programs, newspapers and magazines. Investors incorrectly assume that because the media outlet is reputable the advertisers are as well, not realizing that the media outlet may not screen its advertisers. Ads for frauds often offer high income to the person who will invest enough to cover individual start-up costs, ranging from $50 to several thousand dollars. The only people who make money are the swindlers who receive the start-up investment money. Fraudulent business opportunity ads frequently appeal to people who have few job skills and are desperate for money. Examples include work-at-home and animal raising schemes.

Unregistered Investment Products
Con artists bypass state registration requirements to pitch such products as pay telephone and ATM leasing contracts and other investment contracts with the promise of "limited or no risk" and high returns.

Unlicensed Individuals Selling Securities
Anyone selling securities without a valid securities license should be a red flag for investors. Ask the seller to complete the "Check Before You Invest Form."