Investor scams are alive and well, according to the North American Securities Administrators Association Inc., which has published its annual top-10 list of investor traps.
Economic uncertainty and volatile markets are helping scam artists exploit the fear and greed of unsophisticated and often financially vulnerable investors. “There are thieves out there who think it's a mark of value and self-esteem to steal people's life savings,” said NASAA president David Massey, and the list, which is based on information from NASAA's enforcement division, is intended to get the attention of the mom and pop investors who are the most common victims of these thieves.
To some extent, the scams don't change. “I think there's a standard scam script with blanks and people just fill in the blanks with whatever
investment vehicles are hot,” said Mr. Massey, who is North Carolina's deputy securities administrator.
The hottest products currently are distressed-real-estate schemes, energy investments, gold and precious metals, promissory notes and securitized life settlement contracts. The five scamming practices cited by the organization were affinity fraud, bogus credentials, mirror trading, private placements and investment advice offered by unlicensed agents.
In most cases, the fraudster is selling his or her expertise in buying properties, trading commodities or assessing energy projects. Many of the pitches involve the purveyor “guaranteeing” returns with promissory notes if the project doesn't deliver as promised. With the widely covered collapse of real estate prices and the rise in energy and precious metals prices, scam artists use the news as their marketing resources. “Usually, they are no more than Ponzi schemes,” said Mr. Massey.
Case in point: A Florida-based company, Gold Bullion Exchange, solicited nearly $30 million by phone from 1,400 investors to “purchase” precious metals on margin. Investors were told if they put up a fraction of the cost, margin financing would cover the rest of the purchase price. Investigators found that no bullion was ever purchased.
A common strategy in these schemes is what regulators call affinity fraud, in which crooks solicit money from identifiable groups such as retiree communities or religious and ethnic groups — often posing as a member of the group. Such strategies accounted for 1 in 4 Ponzi schemes over the last decade, according to a national study cited by NASAA. A 73-year-old man in North Carolina raised $18.5 million from more than 100 investors he knew from church and other social circles, to invest in
venture capital projects backed by promissory notes yielding between 10% and 50%. He used new money to pay off earlier investors.
Whether it's an opportunity to get in on the ground floor of a new technology, a can't-fail energy drilling project, or a “mirror trading” scheme that offers the chance to participate in the real-time trades of a “skilled” third party, investors can protect themselves with a little common sense, said Mr. Massey. “If it sounds too good to be true, it is too good to be true,” he said.
“People have to summon up enough emotional control not to make snap decisions. Often a toll-free call to a federal or state securities regulator could have protected their life savings.”
