September 02, 2009
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
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: www.vermontinvestorprotection.info
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