MORRISON RELEASES "DIRTY DOZEN" LIST OF INVESTOR TRAPS FOR 2006
Helena, Mont., Feb. 17, 2006 - Today Montana State Auditor John Morrison outlined a forecast of the 12 most common ways investors are likely to be trapped in 2006. The list was developed in coordination with the North American Securities Administrators Association.
"This dirty dozen list represents the worst of the worst -- and in Montana, we have seen all of these scams, or variations of them," said Morrison. "Investment scams can be devastating for the investor who falls victim, both financially and emotionally. Scams come in many disguises, but they all share a common goal of separating victims from their money. As regulators, we are especially concerned that as the first of the Baby Boomers turn 60 this year they not become trapped in bad investments as their retirement nears."
Before making any investment, Morrison urged investors to ask the following questions: Are the seller and investment licensed and registered in your state? Has the seller given you written information that fully explains the investment? Are claims made for the investment realistic? Does the investment meet your personal investment goals? Morrison also urged investors to contact his office with any questions about an investment product, broker or adviser, before making an investment. "One phone call can save a lot of money and misery," Morrison said.
While the traps below are listed alphabetically, Morrison identified personal information scams, oil and gas investment fraud, and prime bank schemes as the greatest potential threats to investors this year.
Affinity Fraud. Con artists frequently target members of closely knit religious, political, or ethnic groups in an attempt to quickly earn their trust so they can perpetrate fraud.
Churning. An abusive sales practice in which unethical securities professionals make unnecessary and/or excessive trades in order to generate commissions.
Equity Indexed Certificates of Deposit. Since this product is not FDIC insured and instead is tied to the performance of the stock market, there is a possibility of receiving no return on your investment in a declining market. As a result, these products pose liquidity problems and may not be not suitable for seniors who may need the money for retirement living.
Oil and Gas Investment Fraud. High oil prices mean oil and gas scams will continue to attract victims. Con artists will promote oil and gas exploration deals with "official-looking" surveyor maps and "geologist" opinion letters touting the likelihood that the "managers" of the drilling enterprise will hit pay dirt. Promotions are sent regularly to prospective investors more than 1,000 miles from the region being "prospected." Overall, these deals are highly risky and sometimes do not exist at all, but the lure of high profits often proves irresistible to investors.
Personal Information Scams. The first step in separating a victim from his or her money is convincing the victim to divulge personal financial information. Con artists will often represent themselves as some sort of expert, usually a "senior specialist" offering services like preparing a living will in order to gain the trust, and ultimately financial information, of their victims. To the con artist, this information provides a comprehensive laundry list of what is available for the taking.
Prime Bank Schemes. These schemes often promise high-yield, tax-free returns that are said to result from "off-shore trades of bank debentures." There are no such programs, no such debentures and no such high-yield trades. These prime bank schemes are the securities equivalent of a purse snatch. Once the seller has your money, it's gone "off shore" forever.
Pump and Dump Schemes. Unethical broker-dealers frequently "pump" up the value of low-priced securities traded on the NASDAQ "pink sheets" and then "dump" the stock after na´ve investors have purchased the stock at inflated prices. The balloon breaks when the promoters no longer maintain the myth that there is value in the shares and investors are left holding worthless shares. These schemes frequently appear through unsolicited e-mail messages.
Recovery Rooms. Scam artists buy and sell the names and financial information of victims who have lost money to "recovery room" operators who promise, in return for a fee that the victim must pay in advance, to recover the money lost in a worthless investment. These "sucker lists" are bought by crooks who know that people who have been deceived once are vulnerable to additional scams.
Registered High-Interest Promissory Notes Publicly Advertised. Generally, the higher the return promised, the greater the risk to your money. A track record of paying high interest and repaying principal is not an assurance that you will get your money back if the company fails. These notes are not suitable for retirement funds.
Sale and Servicing Contracts. In this scam, a victim is promised a specific rate of return for purchasing a piece of equipment such as a payphone, ATM machine or Internet booth located at a remote venue where the investor cannot service and maintain the equipment and must enter into a servicing agreement. Frequently the equipment or property does not exist and the victim is conned out of their initial investment as well as the servicing fees.
Self-Directed Pension Plans. Many types of securities fraud require the victim to remove funds from legitimate investments such as stock brokerage accounts, insurance policies, deferred compensation plans and mutual funds so that they can be invested in a worthless scam. This scam may begin with advice to convert an employer-sponsored pension into a self-directed pension plan. While these plans may serve legitimate investment purposes, all too often they only serve to benefit the scam artist.
Unsuitable Recommendations. Just as every investor is different, so too are investments. What may be a suitable investment for one investor may not be right for another. Securities professionals must know their customers' financial situation and refrain from making recommendations of securities that they have reason to believe are unsuitable. Variable annuities, for example, are unsuitable for many seniors. Be especially wary of any broker who wants to sell you a variable annuity to hold inside a 401(k) or IRA. You are already getting tax-deferred growth in an IRA or a 401(k), and the variable annuity simply adds a layer of cost with no additional tax benefit. When securities professionals fail to live up to applicable ethical standards, great harm can be done to individual investors.
Recognizing that financial education is a powerful weapon in the fight against investment fraud, Morrison launched InvestSmart Montana -- a program to help Montanans and law enforcement learn about investment fraud and white-collar crime. Funded by a grant from the Investor Protection Trust, InvestSmart Montana blends a unique combination of tools to educate consumers and law enforcement about the pitfalls of investing and helps them to steer clear of frauds and scams. Log onto Morrison's Invest Smart website at www.investsmartmt.org to learn more.