Investment Schemes

Presented byLarry Pnakovich

Senior InvestigatorWest Virginia

Securities Commission

1 x 9 =2 x 9 =3 x 9 =4 x 9 =5 x 9 =6 x 9 = 7 x 9 =8 x 9 = 9 x 9 =

912

3

456

7

81

2

345

6

78

West Virginia Merit Exam

Some rob youwith a gun,

some rob youwith a

fountain pen.Woody Guthrie

Direct Mail Schemes

Door-to-Door Shams

Home Repair Rip-Offs

Mail Fraud

Investment Scams

Theft on the Internet

Con Games

Vacation Scams

Insurance Rip-OffsTelemarketing Swindles

In the perfect financial crime, the victim may NEVER discover

they were victimized, as

in cases involving

contributions to

BogusCharities

Crisis can be similar to violent crime – both short and long term.

• Financial• Physical• Emotional/

Spiritual

Top Ten Investment Scams List

Released byState Securities Regulators

PONZI SCHEMES The premise is simple: promise

high returns to investors and use money from new investors to pay

previous investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion.

SENIOR INVESTMENT FRAUD Volatile stock markets, record low

interest rates, rising health care costs, and increasing life expectancy, have combined to create a perfect storm for investment fraud against senior investors. Seniors are being targeted with increasingly complex investment scams. Here is the Senior top 10 list.

SENIOR INVESTMENT FRAUD TOP 10

1. Promissory notes 2. Viatical settlements

3. Prime Bank Schemes 4. Unlicensed salesmen 5. Investment Seminars 6. Oil and Gas Schemes 7. Charitable Gift Annuities 8. Ponzi/Pyramid Schemes 9. Affinity Group Fraud 10. Equipment Leasing

PROMISSORY NOTES A long-time member of the Top 10

list, these short-term debt instruments often are issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. These notes, however, become vehicles for fraud when the issuer of the note has no intention, or capability, of ever delivering promised returns.

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.

AFFINITY FRAUD

Con artists know that its only human nature to trust people who are like yourself. That’s why scammer’s 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.

INSURANCE AGENT SECURITIES FRAUD

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.

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 referring to them as prime bank notes. 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”.

INTERNET FRAUD With the Internet becoming a common

part of daily life for increasing numbers of people, it should be no surprise that Internet fraud has become a booming business. The most recent figures show cyber-fraudsters took in $122 million in 2002, according to the FTC.

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.

MUTUAL FUND BUSINESS PRACTICES Although mutual funds play a huge role in the

wealth and savings of our nation, scandals throughout the industry demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. 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 traditional 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.

VARIABLE ANNUITIES Regulators are concerned that investors

aren’t being told about high surrender charges and the steep sales commissions agents often earn selling variable annuities. Some investors 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.

Excessive Guaranteed Returns

Fictitious Financial Instrument

Extreme Secrecy

Exclusive Opportunity

Claims of Inordinate Complexity

AVOID BECOMING A VICTIM

• 10 Self-defense Tips

1. Don’t become a “COURTESY VICTIM.”

• Save your good manners for friends and family members, not strangers looking for a quick buck!

2. Check out strangers touting “STRANGE” deals.

• Extensive background information on investment salespeople and firms is available from the Central Registration Depository (CRD) files available from WV Securities Commission. Call 1-888-368-9507.

3. Always stay in charge of your money.

• Beware of anyone who suggests investing you money into something you don’t understand.

4. Don’t judge a book by its cover.

• Successful con artist make even the flimsiest investment deal sound as safe and sound as putting money in a bank.

5. Watch out for salespeople who prey on

your fears.

• Fear can cloud your good judgment.

7. Monitor your investments and ask

TOUGH questions.

• Don’t compound the mistake of trusting an unscrupulous investment professional or outright con artist by failing to keep an eye on the progress of your investment. Insist on regular written reports.

8. Look for trouble retrieving your principal or cashing out

profits.

• If a stockbroker, financial planner or other individual with whom you have invested stalls you when you want to pull out your principal or profits, you have uncovered someone who wants to cheat you.

9. Don’t let embarrassment or fear keep you from reporting investment fraud or abuse.

• Every day that you delay reporting fraud or abuse is one more day that the con artist is spending your money and finding new victims.

10. Beware of “RELOAD” scams.

• Faced with a loss of funds, some seniors who have been victimized once will go along with another scheme in which the con artists promise to make good on the original funds lost…and possibly even generate new returns beyond those originally promised.

Person Invests Money

Common Enterprise

Expects profits solely from the efforts of a promoter or a third party.

“A Security”

COMPLAINTS CONCERNINGBROKERS AND/OR

BROKERAGE FIRMS

1. Contact Branch Manager2. Contact Firm Compliance Officer3. File complaint with NASD*

*NASD National Association of Securities Dealers Arbitration

West VirginiaSecurities Commission

Confidential Complaint Line

Toll Free 888-509-6567

Enforcement/Investigation/CRD Request

Toll Free 888-368-9507

http://nasaa.org/nasaa/

http://nasaa.org/nasaa/abtnasaa/display_top_story.asp?stid=229

Total $1,164,720.00