Common Investment Scams
Here is a list of the top 10 investment scams:
1. "Free lunch" seminars. Often the people getting rich are those running the seminar, making money from the high commission products they sell to attendees. These seminars are marketed through newspaper, radio and TV ads, mass-mailed invitations, and mass e-mails. There's a certain consistency to the invitations for these events: a free gourmet meal, tips on how to earn excellent returns on your investments, eliminate market risks, grow your retirement funds and spouses are encouraged to attend.
The bait for many of these seminars is that "income" will be "guaranteed" and substantially higher than the returns someone on a fixed income can expect to get from certificates of deposit, money market investments, or other traditional financial products. Often the speakers at these events use impressive-sounding but sometimes highly misleading titles and professional designations. Many of these designations imply that whoever bears the title has a special expertise in addressing the financial needs of seniors.
Often promoters push unsuitable products based on high commissions they receive from selling these products. For example, variable and equity indexed annuities are often unsuitable for senior citizens because those products are generally long-term investments that limit access to invested funds. But sales agents stand to earn high commissions on these investment products so they don't always adhere to the suitability standards - with dire consequences for seniors. Remember: Make sure your investments match up with your age, your need for access to money, and your risk tolerance.
2. Unlicensed individuals, such as life insurance agents, selling securities. To verify that a person is licensed or registered to sell securities, call the Office of Financial and Insurance Regulation at (877) 999-6442. If the person is not registered, don't invest.
3. Affinity group fraud. Many scammers 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 - and then steal their life savings. Be wary - no community seems to be without con artists who seek to exploit others for financial gain.
4. Ponzi/pyramid schemes. Always in style, these swindlers promise high returns to investors, but the only people who consistently make money are the promoters who set them in motion, using money from new investors to pay previous investors. Inevitably, the schemes collapse. They're called pyramid schemes because the people on top need to recruit an impossible number of people on the bottom to continually generate profits for everyone. Thus only the top people profit, while the remaining pyramid population lose money. Ponzi schemes are the legacy of Italian immigrant Charles Ponzi. In the early 1900s, he took investors for $10 million by promising 40 percent returns from arbitrage profits on International Postal Reply Coupons.
5. Promissory notes. Short-term debt instruments issued by little-known or sometimes non-existent companies that promise high returns - upwards of 15 percent monthly - with little or no risk. These notes are often sold to investors by independent life insurance agents.
6. Internet fraud. Scammers use the wide reach and supposed anonymity of the Internet to sell thinly traded stocks, bogus offshore "prime bank" investments, and pyramid schemes. Investors should ignore anonymous financial advice on the Internet and in chat rooms.
7. Payphone and ATM sales. Investors leased payphones for between $5,000 and $7,000 and were promised annual returns of up to 15 percent. The largest of these investments appeared to be nothing but Ponzi schemes.
8. "Callable" CDs. These higher-yielding certificates of deposit won't mature for 10 to 20 years, unless the bank, not the investor, "calls," or redeems, them. Redeeming the CD early may result in large losses-upwards of 25 percent of the original investment. Regulators say sellers of callable CDs often don't adequately disclose the risks and restrictions.
9. Viatical settlements. Originated as a way to help the gravely ill pay their bills, these interests in the death benefits of terminally ill patients are always risky and sometimes fraudulent. In a legitimate investment, the insured is paid a percentage of the death benefit in cash in exchange for the investor getting a share of the death benefit when the insured dies. Because of uncertainties predicting when someone will die, these investments are extremely speculative. In a more recent twist, "senior settlements" - interests in the death benefits of healthy older people - are now being offered to investors.
10. Prime bank schemes. Scammers promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. Purveyors of these schemes often target conspiracy theorists, promising access to the "secret" investments used by the Rothschilds or Saudi royalty. The investment may sound good when they tell you it's guaranteed to reap large financial rewards. However be suspicious when the offer is said to be limited to only a few people and is only good for an immediate response.