Top 10 Financial Scams: Products and Practices

Advisors and investors beware: Even though Bernie Madoff is gone, economic uncertainty and volatile stock markets still breed con artists itching to trap the unwary or merely desperate.

During turbulent economic times like we’re currently facing, “con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” says David Massey, president of the North American Securities Administrators Association (NASAA) and North Carolina deputy securities administrator.

To help advisors alert their clients of the latest scams, NASAA recently released its listing of the Top 10 financial products and practices: five of each.

“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” says Massey. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”

Read on for more details about these scams du jour.  

PRODUCT SCAM #1:  Distressed Real Estate.

Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors. Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully.

Check out this scam: In February, a Florida man pleaded guilty to conspiracy to commit mail and wire fraud in a scheme that solicited $2.3 million from 39 investors nationwide to purchase and refurbish distressed properties and, in turn, sell them for a profit. Investors were issued corporate promissory notes with returns of up to 12%.

PRODUCT SCAM #2:  Energy Investments.

Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. 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.

Colorado securities regulators issued a cease-and-desist order earlier this year against a Texas oil and gas company for allegedly violating state securities registration and licensing provisions. The case came to light after a company sales agents unwittingly “cold called” an employee of the Colorado Division of Securities and offered a joint venture interest in two Pennsylvania oil wells with next to no drilling risk.

PRODUCT SCAM #3:  Gold and Precious Metals.

Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. Despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets.

In 2011, the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported “leverage” financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a “clearing firm.”

PRODUCT SCAM #4:  Promissory Notes.

Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations.

A former FBI agent was convicted in Alabama this year after an investigation by Alabama securities regulators revealed that he used promissory notes guaranteeing returns as high as 12% to lure investors into a Ponzi scheme. The funds were to be invested in real estate and medical technology ventures, but investigators determined that the former agent used most of the funds, more than $4 million, to pay Ponzi-style returns to previous investors and for his personal use.

PRODUCT SCAM #5:  Securitized Life Settlement Contracts.

Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies. Outside the legitimate offerings, crooks are embracing new schemes to deceive even cautious investors.

For example, in 2011, two executives of National Life Settlements of Houston were indicted on charges of securities fraud and the sale of unregistered securities after an undercover investigation by Texas securities regulators determined the pair had sold $30 million in unregistered promissory notes secured by life settlement contracts. One of the executives was a three-time convicted felon with a long history of investment fraud. The promise of a safe investment with annual returns as high as 10% served as bait to lure investors into what a court-appointed receiver testified was a Ponzi scheme.