Top 10 Investing Scams

By Kay Bell and Amy Fleitas, Bankrate.com

The stock market has picked up steam lately,  but for many investors the resurgence isn't  enough. Instead, they look for quicker ways  to bolster their portfolios. The problem is,  some promised high-return opportunities are  downright frauds.

Ponzi scammers top the list of scam artists  taking return-hungry investors to the cleaners,  according to the latest look at the investment  industry by the North American Securities  Administrators Association. A close second  is investment fraudsters targeting seniors.

"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," says Ralph  A. Lambiase, NASAA president and director  of the Connecticut Division of Securities.  "It pays to remember that if an investment  opportunity sounds too good to be true, it  usually is."

A promise of 40% returns?

The quest for a safe investment vehicle  is the common theme in all the scams. Here  are this year's top 10, ranked roughly in  order of prevalence or seriousness:

1. Ponzi schemes. This is  an old scam named for Charles Ponzi, a swindler  from the early 1900s who conned $10 million  from investors by promising 40% returns. His  scam has been copied by countless crooks.  The formula is simple: Promise high returns  to investors and use their money to pay previous  investors. Check out your options. Find the  best rate before you borrow.

According to the NASAA, Ponzi scammers often  blame government intervention for the failure  of their system. In Mississippi last year,  two Ponzi scammers pled guilty to a scheme  that bilked 41 investors from four states  out of $10.2 million. They told investors  they were taking part in a money-trading program.  The program never existed.

2. Senior investment fraud.  Record-low investment rates, rising health  care costs and an increased life expectancy  have set seniors up as targets for con artists  peddling investment fraud -- like Ponzi scams,  unregistered securities, promissory notes,  charitable gift annuities and viatical settlements.  Last year, Pennsylvania securities regulators  shut down a Ponzi scheme that bilked $2 million  from seniors' pensions and IRAs.

3. Promissory notes. These  are short-term debt instruments often sold  by independent insurance agents and issued  by little-known or nonexistent companies.  They typically promise high returns, upward  of 15% monthly, with little or no risk.

Bad brokers and not-really-brokers

4. Unscrupulous stockbrokers.  As share prices tumble, some brokers cut corners  or resort to outright fraud, say state securities  regulators. And investors who have grown more  cautious and scrutinized their brokerage statements  have discovered their financial adviser has  been bilking them via unexplained fees, unauthorized  trades or other irregularities.

5. Affinity fraud. Taking  advantage of the tendency of people to trust  others with whom they share similarities,  scammers use their victim's religious or ethnic  identity to gain their trust and then steal  their life savings. The techniques range from  "gifting" programs at churches to  foreign exchange scams.

6. Unlicensed individuals,  such as independent insurance agents, selling  securities. From Washington state to Florida,  scam artists use high commissions to entice  independent insurance agents into selling  investments they may know little about. The  person running the scam instructs the unlicensed  sales force to promise high returns with little  or no risk.

This is the third year this entry has been  on the top 10 list.

Investors approached by an independent agent  should first call the state's securities regulator  and ask if the salesperson is licensed. Then  ask whether the investment being offered is  registered as well. If the answers are yes,  the investors should be more comfortable about  the product. But investors should review the  product with the same healthy skepticism that  they would any investment opportunity.

Conspiracies behind every tree

7. "Prime bank" schemes.  Con artists promise investors triple-digit  returns through access to the investment portfolios  of the world's elite banks. Purveyors of these  schemes often target conspiracy theorists,  promising access to the "secret"  investments used by the Rothschilds or Saudi  royalty. In an effort to warn investors, the  Federal Reserve pointed out that these don't  exist. But unfortunately, that government  denouncement just feeds into the conspiracy  mindset linked to this scam.

8. Internet fraud. According  to NASAA, Internet fraud has become a booming  business. In November, federal, state, local  and foreign law-enforcement officials targeted  Internet fraudsters during Operation Cyber  Sweep. They identified more than 125,000 victims  with estimated losses of more than $100 million  and made 125 arrests.

"The Internet has made it simple for  a con artist to reach millions of potential  victims at minimal cost," says Lambiase.  "Many of the online scams regulators  see today are merely new versions of schemes  that have been fleecing off-line investors  for years."

Lambiase warns consumers to avoid the infamous  Nigerian 419 scam, saying Internet users should  ignore e-mails from individuals in need of  help who want to deposit money in overseas  bank accounts.

"Don't be dot-conned," he says.  "If you get an e-mail pitching a deal  that can't be beat, hit delete."

Funds and annuities

9. Mutual fund business practices.  Recent mutual fund scandals have made the  national news and attracted the attention  of investors and launched several investigations.

"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,"  says Lambiase. "We will continue to actively  pursue inquiries into mutual fund improprieties,"  he says.

10. Variable annuities.  As sales of variable annuities have risen,  so have complaints from investors -- most  notably, the omission of disclosure about  costly surrender charges and steep sales commissions.  According to the NASAA, variable annuities  are often pitched to seniors through investment  seminars -- but regulators say these products  are unsuitable for many retirees. Lambiase  says variable annuities make sense only for  consumers who can afford to have their investment  locked up for 10 years or longer.

"Our fight against fraud never stops  because each year con artists discover new  ways to fleece the public," says Lambiase.  "Sadly, many of the age-old scams still  work to cheat victims of their hard-earned  savings as well."

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