Top investment scams gone wild

October 4, 2010

MADOFF/BAILIt’s not hard to find the hottest investment scams. Just read the business headlines. What’s making money?

The who’s who of scamsters are not household names like Bernie Madoff. They are guys working the Internet, selling the next “green technology” or smoothly working Ponzi schemes in church groups. They might even be your neighbor.

I just got an email from someone I didn’t know in England who claims he was beaten and stranded. And all he needed was about $10,000 to get back home! Coincidentally, I also met a fellow with the same story on the streets of Baltimore, although he was asking for considerably less.

These frauds are often hard to identify because our skeptical reasoning is often clouded by trust and greed (on our part), which the perpetrators count on when they work their wiles.

I had a chance to catch up with some state securities cops recently. They are spotting some compelling pitches that are trapping investors all over the country.

Forex Trading. This is short for foreign exchange and currency, which is roughly 50 times the size of the stock market. Schemes involving market-beating software and techniques abound. The biggest banks and institutions trade every day. You think you can beat them?

Exchange-Traded Funds. While ETFs are perfectly legitimate listed pools of money, the idea that you can use them to make a killing on gold, foreign stocks or a single industry is ludicrous. Nobody has a product that can best the market consistently.

Environmental Technologies. Sure, wind and solar look awfully good right now, but the chances you will be able to get in on the ground floor of a breakthrough technology at a good price are slim to none.

Neighbors Selling to Neighbors. Regulators call this “affinity fraud.” They could be part of an association, church, group or investment club. One such scam, called “blind real estate pools,” involve brokers who sell interest in properties — that they don’t actually own. Joe Borg, Alabama Securities Commission director, said he’s seen these schemes popping up in the south. Military families near major bases also are being pitched “Iraqi dinar” schemes, where they are speculating on an upsurge in the country’s currency.

Commodity Scams. Name the commodity and there’s some kind of scam attached to it. With the price of gold hitting record highs, gold-mining fraud has become popular in the West. Others may involve oil and gas extraction.

“Off the books,” special or private placement deals. Unlisted securities are always a perennial trouble spot. Believe me, no small investor is going to get a better deal than the banks and guys on Wall Street. The only people getting rich off of these opportunities are the purveyors of them.

Variable Annuities. Like ETFs, these are legitimate insurance products, although they are rarely suitable for most investors.

How do you avoid these deceptions? Employ the smell test. Are the returns touted far above market rates? Is high performance promised in a short period of time? What are the total fees and commissions involved before a single dollar is invested?

Do some realistic comparisons. Remember, the S&P 500 stock index was down 10 percent over the past decade despite rising 23 percent last year. Also ask for a prospectus and if what is being sold is a listed security.

Better yet, check the background of the broker or adviser selling the investments. Do they have a criminal or disciplinary record? You should be able to check their registration with your state securities regulator or through the securities industry’s BrokerCheck system or through the SEC.

Photo: Accused swindler Bernard Madoff exits the Manhattan federal court house in New York January 14, 2009. REUTERS/Brendan McDermid


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