News Releases

September 02, 2009

State Announces This Year’s Top 10 Investor Traps

Montpelier, VT— Where can you safely and profitably invest your money in today’s turbulent

marketplace? As you ponder that question, you can start with a small but empowering step.

Learn where not to invest your money.

Each year the Vermont Department of Banking, Insurance, Securities & Health Care

Administration (BISHCA) broadcasts the top ten investor traps to avoid. These have been

identified by the Enforcement Trends Project Group of the North American Securities

Administrators Association (NASAA), of which BISHCA is a member. The types of offers on

the Top Ten list may especially appeal to cash-strapped investors hungry to recover lost financial

ground. BISHCA Commissioner Paulette Thabault said, “Lesson number one is, verify

everything and everyone before you part with your money. Despite promises of high returns,

these offers provide little if any disclosure of significant risks. What you can count on is that

they pay high commissions to aggressive sales forces.”

How can you investigate a potential investment deal? BISHCA provides investors some

important tools for basic screening purposes. First, find out if the seller is registered with the

Securities Division to do business in Vermont. It is illegal to offer or sell unregistered securities.

Commissioner Thabault said, “While buying from a legally registered seller does not guarantee

you a risk-free investment, buying from an unregistered seller almost certainly puts your money

at risk.”

You can also call the Vermont Securities Division at 802-828-3420 to:

-Find out whether a person is licensed to sell securities or offer investment advice.

-Find out whether a stock or other investment is registered for sale in Vermont.

-Report suspected investor fraud or abuse.

-Request consumer education materials on safe investment practices.

Investors can also conduct their own background research on various financial professionals on

the state Securities Division website:

And (drum roll), the Top Ten Investor Traps (in alphabetical order) are:

Entertainment Investments. These unregistered investments, encompassing a variety of

products including movies, infomercials, Internet gambling and pornography sites, promise high

returns while offering little disclosure of risk.

Gold Bullion and Currency Scams. With the high price of gold, investors should beware of

gold bullion scams in which the seller offers to retain “purchased” gold in a “secure vault” and

promises to sell the gold for the investor as it gains in value. In many instances the gold does not

exist. There are many similar forms of foreign exchange (forex) trading schemes. Trading in

foreign currencies requires resources far beyond the capacity of most individual investors.

Promoters profit by charging high commissions or selling investment strategies assuming that

trades are actually made. In many instances there are no trades; the money is simply stolen.

Leveraged Exchange-Traded Funds (ETFs). This relatively new financial product has been

offered to individual investors who may not be aware of the risks these funds carry. The funds,

which trade throughout the day like a stock, use exotic financial instruments, including options

and other derivatives, and promise the potential to provide returns greater than the market as the

value of the underlying assets rise or fall. Given their volatility, these funds typically are not

suitable for most retail investors.

Life Settlements. State securities regulators long have been concerned about life settlements, or

viaticals, and the rising popularity of these products among investors has prompted a recent

Congressional investigation. While life settlement transactions have helped some people obtain

funds needed for medical expenses and other purposes, those benefits come at a high price for

investors, particularly senior citizens. Wide-ranging fraudulent practices in the life settlement

market include Ponzi schemes; fraudulent life expectancy evaluations; inadequate premium

reserves that increase investor costs; and false promises of large profits with minimal risk.

Natural Resource Investments. BISHCA expects to continue to see a rise in energy and

precious metals scams promising quick, high returns. Investors anxious to recover losses quickly

may be hooked by oil and gas schemes, as well as fraudulent offerings of investments tied to

natural gas, wind and solar energy, and the development of new energy-efficient technologies.

Ponzi Schemes. Despite the heightened awareness of Ponzi schemes following Bernard

Madoff’s multi-billion dollar fraud and 150-year prison sentence, these scams continue to trap

investors. The Ponzi scheme is a house-of-cards swindle in which high returns are paid to initial

investors out of the funds of later investors, who end up losing all or most of their money to the

promoter. Beware of investment opportunities promising unusually high and steady rates of

return. While some Ponzi investors may have a slight chance of realizing a return on their

investment, most investors have from the outset no hope of recovery. Ponzi schemes are the

securities world’s equivalent of a purse snatch.

Private Placement Offerings. Private placements offer businesses the opportunity to raise

capital by selling securities to a relatively small number of investors as opposed to a public

offering made through national securities markets. State securities regulators have observed a

steady and significant rise in the number of private placement offerings that are later discovered

to be fraudulent, especially those made under a federal registration exemption (Regulation D,

Rule 506). Companies using this exemption can raise an unlimited amount of money without

registering the offering with the SEC as long as they meet certain standards. Although properly

used by many legitimate issuers, the exemption has become an attractive option for con artists, as

well as individuals barred from the securities industry and others bent on stealing millions of

dollars from investors through false and misleading representations.

Real Estate Investment Schemes. State securities regulators have noted a rise in scams

disguised as offers to help homeowners caught up in the turbulent housing market “save” their

homes or “fix” their mortgages, usually in exchange for a fee paid in advance. Most of these

advance-fee offers only generate a quick profit for the con-artist and provide no benefit to the

consumer. Some homeowners, particularly seniors, may be attracted to reverse mortgages, which

are a legitimate lending option. However, the resulting lump sum home equity payment makes

them an attractive target for unscrupulous salesmen, who may attempt to direct these funds

toward worthless or unsuitable investment products.

Short-term Commercial Promissory Notes. Many seniors have lost their life savings by

investing in short-term commercial promissory notes that are nine months or less in duration.

These notes may be touted as being “insured” or “guaranteed,” but the insurance companies

generally are located outside of the United States, are not licensed to do business in the United

States, and lack the resources necessary to deliver on the promised guarantees. Unlike publicly

advertised promissory notes, promoters of these notes usually attempt to use commercial paper

exemptions as a basis for selling the products without registration. The commercial paper

exemptions apply only to high-grade commercial paper traded by major corporations – not to

these risky notes pushed to the public by a sales force paid with extremely high commissions.

Speculative Inventions and New Products. New products are for venture capitalists who know

how to assess the risks. They are not good investments for your retirement money even though

they may promise high returns.

(Note: While the order of items above is alphabetically, NASAA identified real estate investment

schemes, leveraged ETFs, private placement offerings, natural resources investments and Ponzi

schemes as the greatest potential threats to investors this year.)

Source: Banking, Insurance, Securities Health Care Administration
Last Updated at: September 02, 2009 13:44:03