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1. PONZI SCHEMES.
Named for swindler Charles Ponzi, who in the early 1900s took
investors for $10 million by promising 40 percent returns,
these schemes are a perennial favorite among con artists. The
premise is simple: promise high returns to investors and use
money from previous investors to pay new investors.
Inevitably, the schemes collapse and the only people who
consistently make money are the promoters who set the Ponzi in
motion. Con artists typically attribute government
intervention as the reason why new investors didn’t get their
promised returns. In Mississippi last year, a Tennessee
attorney and a Mississippi securities dealer pled guilty to 58
counts of investment fraud for their role in a Ponzi scheme
that bilked 41 investors from four states out of $10.2
million. Authorities said the victims were told they were
investing in a money-trading program that, in fact, did not
exist. TOP
2. SENIOR INVESTMENT FRAUD.
Volatile stock markets, low interest rates, rising health care
costs, and increasing life expectancy, combined to create a
perfect storm for investment fraud against senior investors.
State securities regulators said older investors are being
targeted with increasingly complex investment scams involving
unregistered securities, promissory notes, charitable gift
annuities, viatical settlements, and Ponzi schemes all
promising inflated returns. Pennsylvania securities regulators
last year shut down a “Ponzi” scheme that targeted seniors,
but not before 13 Philadelphia-area investors had lost nearly
$2 million from their pensions and IRAs. In Arizona, the
Arizona Corporation Commission ordered a Scottsdale company
and four individuals to return more than $15 million to mostly
senior investors and pay penalties of $45,000 to the state in
a case involving “CD alternatives” earning up to 8.5 percent.
“These schemes offer products and pitches that may sound
tempting to many seniors who’ve seen their retirement accounts
and income dwindle in recent years,” Lambiase said. To learn
more, visit NASAA’s
Senior Investor Resource Center. TOP
3. PROMISSORY NOTES.
A long-time member of the Top 10 list, these short-term debt
instruments often are sold by independent insurance agents and
issued by little known or non-existent companies promising
high returns – upwards of 15 percent monthly – with little or
no risk. When interest rates are low, investors often are
lured by the higher, fixed returns that promissory notes
offer. These notes, however, can become vehicles for fraud
when the issuer of the note has no intention or capability of
ever delivering the returns promised by the sales person. In
November 2003, for example, Grammy-nominated polka star Jan
Lewan pled guilty to charges that he defrauded investors in 21
states through the sale of promissory notes. State authorities
said Lewan, who defected from Poland in 1979 and launched a
successful career that included performances before President
Reagan and Pope John Paul II, illegally persuaded investors to
invest in a series of failing business ventures. Lewan offered
promissory notes that were supposed to pay an interest rate of
12 to 20 percent. Authorities said investors lost between $2
million and $2.5 million. Lewan sold the promissory notes
during a period of time when he was under a five-year ban by
the Pennsylvania Securities Commission barring him from
selling securities in the state. New Jersey authorities also
acted against Lewan in 2003, fining him $950,000 and
prohibiting him from selling securities in the state.
Connecticut securities regulators are also investigating Lewan.
TOP
4. UNSCRUPULOUS BROKERS.
Despite the stock market’s rebound in 2003, state securities
regulators say they are still receiving a high level of
complaints from investors of brokers cutting corners or
resorting to outright fraud to fatten their wallets. “I give
credit to the increasing numbers of investors who are giving
their brokerage statements a closer look and asking the right
questions about unexplained fees, unauthorized trades or other
irregularities,” Lambiase said. In October 2003, US Bancorp
Piper Jaffray agreed to pay $2.6 million to settle a complaint
by the state of Montana alleging unethical business practices
and fraudulent securities dealing by the investment firm and
one of its brokers. State regulators accused Thomas J. O`Neill,
who was a broker in the firm’s Butte office, of making more
than 6,000 unauthorized trades for mostly elderly customers
between 1997 and early 2001. They said some trades were made
for a customer who was in a coma and again after he died.
Authorities said O`Neill generated commissions for himself and
the firm through the illegal trades that transformed mostly
conservative retirement investments into risky portfolios.
TOP
5. AFFINITY FRAUD.
Con artists know that its only human nature to trust people
who are like yourself. That’s why scammers often use their
victim’s religious or ethnic identity to gain their trust and
then steal their life savings. No group seems to be immune
from fraud. In November 2003, authorities arrested five people
accused of defrauding evangelical Christians of $160 million
in three years and using the money to live extravagantly.
Federal and state investigators charged that a California
family promoted an affinity fraud scheme through evangelical
leaders and groups, targeting people who shared religious
beliefs and common ethnicities. A joint effort involving the
FBI, the SEC, the IRS and the Texas State Securities Board,
brought criminal and civil charges to halt the scheme, which
promised returns of 25 percent within three months. TOP
6. INSURANCE AGENTS & OTHER UNLICENSED
SECURITIES SELLERS.
While most independent insurance agents are honest
professionals, too many are lured by high commissions into
selling fraudulent or high-risk investments, such as
promissory notes, ATM and payphone investment contracts and
viatical settlements. “Scam artists continue to entice
independent insurance agents into selling investments they may
know little about,” Lambiase said. The person running the scam
instructs the independent sales force – usually insurance
agents but sometimes investment advisers and accountants – to
promise high returns with little or no risk. For example:
Arizona securities regulators in 2003 obtained a $4.3 million
final judgment against a Scottsdale company and two insurance
agents who fraudulently sold charitable gift annuities to
mostly senior investors who were told their money would be
invested in secure accounts. Instead it was placed in
high-risk, speculative investments while the insurance agents
helped themselves to $1.3 million in commissions. California
authorities in 2003 ordered several insurance agents to stop
selling viatical investments – interests in the death benefits
of terminally ill patients that are always high risk and
sometimes fraudulent. The agents promised returns as high as
150 percent in three years, and guaranteed the investment
through a “fidelity” bond, but failed to tell investors that
the bond was issued by a company incorporated in Vanuatu,
South Pacific that is not licensed by to issue bonds in
California. TOP
7. PRIME BANK SCHEMES.
A perennial favorite of con artists who promise investors
triple-digit returns through access to the investment
portfolios of the world’s elite banks. The negative publicity
attached to these schemes has caused promoters in recent cases
to avoid explicitly referring to Prime Banks. Now it is common
to avoid the term altogether and underplay the role of banks
by referring to these schemes as “risk free guaranteed high
yield instruments” or something equally deceptive. In 2003,
five Oklahoma men were convicted on fraud charges stemming
from a prime bank scheme in which 5,000 investors lost $14.6
million. TOP
8. INTERNET FRAUD.
With the Internet becoming a common part of daily life for
increasing numbers of people, it should be no surprise that
con artists have made cyberspace a prime hunting ground for
victims. Internet fraud has become a booming business. The
most recent figures show cyberfraudsters took in $122 million
in 2002, according to the Federal Trade Commission. “The
Internet has turned from an information superhighway to a road
of ruin for victims of cyber fraud,” Lambiase said. The
Internet has made it simple for a con artist to reach millions
of potential victims at minimal cost. Many of the online scams
regulators see today are merely new versions of schemes that
have been fleecing offline investors for years.” In November
2003 various federal, state, local, and foreign
law-enforcement agencies targeted cyberfraudsters and netted
125 arrests and more than 70 indictments. Operation Cyber
Sweep identified more than 125,000 victims with losses
estimated to exceed $100 million. Lambiase also warned
investors to ignore e-mail offers from individuals
representing themselves as Nigerian or West African government
or business officials in need of help to deposit large sums of
money in overseas bank accounts. “Don’t be dot.conned. If you
get an e-mail pitching a deal that can’t be beat, hit delete,”
Lambiase cautioned. TOP
9. MUTUAL FUND BUSINESS PRACTICES.
Although mutual funds play a tremendous role in the wealth and
savings of our nation, ongoing scandals throughout the
industry clearly demonstrate that some in the mutual fund
industry are putting their own interests ahead of America’s 95
million mutual fund shareholders. State securities regulators,
the SEC, NASD, and mutual-fund firms themselves have launched
a series of inquiries into mutual fund trading practices. To
date, more than a dozen mutual funds are under investigation
and several mutual funds and mutual fund employees have either
pleaded guilty, been charged or settled with state regulators.
State and federal investigations have uncovered sales contests
where investors have been steered to funds paying higher
commissions to brokers; abusive trading practices, such as
“market timing,” that may cost tradition buy-and-hold
investors more than $5 billion each year; and illegal trading
practices, such as “late trading,” that may cost investors
$400 million each year. “These investigations demonstrate a
fundamental unfairness and a betrayal of trust that hurts Main
Street investors while creating special opportunities for
certain privileged mutual fund shareholders and insiders,”
Lambiase said. “We will continue to actively pursue inquiries
into mutual fund improprieties and are committed to
aggressively addressing mutual fund complaints raised by
investors in our jurisdictions.” TOP
10. VARIABLE ANNUITIES.
Sales of variable annuities have increased dramatically over
the past decade. As sales have risen, so too have complaints
from investors. Regulators are concerned that investors aren’t
being told about high surrender charges and the steep sales
commissions agents often earn when they move investors into
variable annuities. Some investors also are misled with claims
of guaranteed returns when variable annuity returns actually
are vulnerable to the volatility of the stock market. The
benefits of variable annuities – tax-deferral, death benefits
among others – come with strings attached and additional
costs. High commissions often are the driving force for sales
of variable annuities. Mississippi securities regulators moved
last year against a licensed securities broker in the state
who rang up commissions of approximately $1 million within a
15-month period largely through sales of variable annuities.
Often pitched to seniors through investment seminars,
regulators say these products are unsuitable for many
retirees. “Variable annuities make sense only for consumers
willing to invest for 10 years or longer, but they are not
suitable for many retirees who cannot afford to lock up their
money for a long time,” Lambiase said. Variable annuities are
considered to be securities under federal law and the laws of
17 jurisdictions. Most states consider variable annuities to
be insurance products. NASAA is encouraging changes in state
laws that would allow state insurance regulators to continue
to oversee the insurance companies that sell variable
annuities while authorizing state securities regulators to
investigate complaints about variable annuities and to take
action against the companies and individuals who sell them.
“Those who buy variable annuities should not be denied the
protections enjoyed by every other class of investor,”
Lambiase said. TOP |
