Six investment scams to avoid

September 7, 2011

Money is a powerful lure. Pretty much everyone wants more of it, and a whole lot of people want to get theirs by taking it from others. Investors are typically more savvy, but they’re targets nonetheless.

The North American Securities Administrators Association (NASAA) put together its annual list of “tricks and traps” for investors to avoid. For most, due diligence and skepticism is what stands between the investor and the scam.

Here are some of the scams to watch out for so you’re better prepared if one comes your way.

Real estate
The beaten-down real estate market, with its abundant opportunities for real investors, has also spurred a growth in schemes tied to distressed properties. Earlier this year, Lawrence R. Hamel was convicted in federal court in Florida of a conspiracy that took $2.3 million from 39 investors around the country who thought their money was going to refurbish distressed properties that would then be sold for a profit. Authorities say Hamel didn’t buy properties and used the money from later investors to pay earlier investors in a Ponzi scheme.

These scams are connected to the time-honored lure of buying into the big rewards that come with investing in oil and gas reserves. “Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich,” the NASAA warns.

As the price of gold has risen, so has the temptation to get a piece of the action. That’s a powerful draw for a scam. There are a couple of variations in this arena, the NASAA says. One offers investors a chance to buy into a mine that had been closed with the promise of getting all their money back plus interest. Another involves marketing coins or nuggets that supposedly have a superior return. This summer, the operator of the Lake Worth, Florida-based Gold Bullion Exchange was accused of defrauding more than 1,400 investors of more than $25 million. Jamie Campany allegedly got investors to buy under a variation of margin financing, and collected commission and fees but never bought any bullion.

Promissory notes
On the face of it, these seem like a good investment. After all, it’s on paper that you’re going to get a fat return on your investment. “Unregistered promissory notes are often covers for Ponzi schemes and other scams,” NASAA warns. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered. Former FBI agent Cary Alan Burdette pleaded guilty this summer to using promissory notes in a scheme that brought in more than $4 million.

Mirror trading
The idea of creating an investment plan that mirrors someone successful at making money, such as Warren Buffett, isn’t new. But using the lure of an automated trading system based on duplicating a third party’s investments to rip you off is. “Investors should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms,” NASAA says. “They should also recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a way to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.”

Private placement offerings
NASAA warns that private placement offerings, where investors are chosen to participate, has considerable risks: “Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight. In the United States, the federal exemption for private placement offerings provided under Rule 506 of Regulation D continues to be abused by criminals.” There are legitimate deals, the group says, but participating in a private placement requires additional scrutiny.

NASAA also warned investors about:

  • Receiving advice on securities from those without proper licenses
  • Buying securitized life settlement contracts
  • Succumbing to affinity fraud by believing a schemer is credible because they appear to have the support of a particular group or organization
  • Salesmen or schemers with phony or inflated credentials, such as the broker in Utah who had the initials “C.H.S.G.” follow his name on his business card. The initials stood for Certified High School Graduate.

Before embarking on any non-traditional investment, be sure of who you are dealing with. Con artists can be slick, so don’t just look at what you’re given. Do your own homework and, at a minimum, make sure who you’re dealing with has the proper credentials for what they’re selling.

One comment

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C.H.S.G… I’m going to have to remember that one!

Posted by AltonBob | Report as abusive