Beware the Scammers!
- C. Scott Houser Sound Mind Investing
- 2003 9 Jul
In my 20 years in the financial services industry, I cannot remember a time when scam artists have had it so good. Those invested in stocks have experienced three straight years of declines in the S&P 500. People are sure there must be some overlooked market sector or venture capital opportunity where their losses can be recaptured.
Even previously smug fixed income investors who watched their friends bet it all on the technology bubble have seen their money market returns dip below 1 percent. Now they are willing to take a little risk for a "guaranteed high return."
Yes folks, we investors were spoiled in the '90s and we are impatient for good news. That makes us easy prey for telemarketers and the con artists of the Internet. State securities regulators just released their annual "Top 10 Investment Scams" list. See if any are familiar (I hope not):
1. Unlicensed individuals, such as life insurance agents, selling securities. If someone tries to sell you an investment, perform some due diligence on the individual as well as the investment. Does the individual have expertise in what they are trying to sell you?
2. Affinity group fraud. Many scammers use their victim's religious or ethnic identity to gain their trust — knowing that it's human nature to trust people who are like you — and then steal their life savings. Do not trust someone just because they are a Christian or because you go to church with them.
3. Payphone and ATM sales. In early March, 25 states and the District of Columbia announced actions against companies that scammed roughly 4,500 people for more than $75 million by selling coin-operated, customer-owned telephones. Watch out for any scheme that promises to make you your own boss and offers you increased leisure time. Building a business by buying overpriced vending machines and locating them in "undiscovered locations" falls into this category.
4. Promissory notes. Short-term debt instruments issued by little-known or non-existent companies that promise high returns — upwards of 15 percent monthly — with little or no risk. It amazes me to see how many investors will set aside their common sense when the words "bank", "promissory", and "guaranteed" are used in the pitch.
5. Internet fraud. Scammers use the wide reach and supposed anonymity of the Internet to "pump and dump" thinly traded stocks, peddle bogus offshore "prime bank" investments, and publicize pyramid schemes. I received an offer today that, for only $39.95, promises I can watch Internet earnings flood into my bank account. Never invest via an unsolicited Internet plea.
6. Ponzi/pyramid schemes. Always in style, these swindles promise high returns to investors, using money from previous investors to pay new investors. I know of one lady who lost 100 percent of her 401(k) in a Ponzi scheme sponsored by a member of her church (located just two miles from my house). Total losses exceeded $5 million. Characteristics of a Ponzi scheme are extraordinarily high returns and a fear of missing out if you do not get in on the deal soon.
7. "Callable" CDs. These higher-yielding certificates of deposit won't mature for 10-to-20 years, unless the bank, not the investor, "calls," or redeems, them. Redeeming the CD early may result in large losses — upwards of 25 percent of the original investment. I have found that investors focus primarily on the benefits and often do not take the time to look into the "what ifs" like early surrender charges.
8. Viatical settlements. Originated as a way to help the gravely ill pay their bills, these interests in the death benefits of terminally ill patients are always risky and sometimes fraudulent. The insured gets a percentage of the death benefit in cash; investors get a share of the death benefit when the insured dies. The sooner the insured dies, the greater the return on investment. Legitimate companies offering these investments do exist, but is this really how you want to make money?
9. Prime bank schemes. Scammers promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. In North Dakota, state securities regulators are alleging a small group of salesmen, including a local pastor, used religion and family ties to bilk investors out of $2 million in a prime bank scam. Words to watch out for include "debentures, arbitrage, asset protection trusts, currency swaps, off balance sheet financing, and offshore banking." These schemes attract investors by painting a mystique of not being available to the general public and dropping names like "Rothschild" and "Rockefeller."
10. Investment seminars. Usually the people getting rich are those running the seminar, making money from admission fees and the sale of books and audiotapes. These seminars are marketed through newspaper, radio and TV ads and "infomercials" on cable television. If getting rich quick is as easy as these folks claim, I would have done it by now! When infomercials offer you quick and easy solutions to riches, weight loss, or body sculpting, they are selling you a false promise for something that takes discipline.
Sadly I have seen clients and friends — against the advice of their spouses and their professional advisors — lose money in financial schemes that sounded too good to be true. If you want to see if you personally could be prone to an investment scheme, go to North American Administrators Association (NASAA) and take their 12 question educational self-test on your investment savvy. Also, here are some tips from state securities regulators:
- Be realistic. Some things really are too good to be true. Get a professional, third party opinion when presented with investment opportunities that seem to offer unusually high returns in comparison to other investment options. Pie-in-the-sky promises often signal investment fraud;
- Hang up on aggressive cold callers promoting "safe" investments such as precious metals, oil, or gas and ignore unsolicited e-mail or Internet chat room talk about small companies with new anti-terrorist technologies or products;
- Request written information that fully explains the investment, such as a prospectus or offering circular. The documentation should contain enough clear and accurate information to allow you or your financial adviser to evaluate and verify the particulars of the investment;
- Contact your Secretary of State to check that both the seller and investment are licensed and registered to do business in your state. If they are not, they may be operating illegally.
Most importantly, use biblical common sense. Proverbs 13:11 (Amplified) says that "Wealth (not earned) but won in haste, or unjustly, or from the production of things for vain or detrimental use (such riches) will dwindle away, but he who gathers little by little will increase them."
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website.