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Investment scams

WASHINGTON/(United Press International via COMTEX) -- State securities regulators released a list of the "Top 10 Investment Scams" Monday, in an effort to combat the large volume of scamming, including the newer practice of Internet-perpetrated investment fraud.

In the list released by the North American Securities Administrators Association (NASAA) were such new additions as risky payphone and ATM investments, often sold by independent life insurance agents, and so-called "callable" certificates of deposits sold to older Americans, which turn out to require a 10 or 20 year maturity period before they can be cashed.

"Our volatile markets have investors, particularly older Americans dependent on predictable interest income, looking for safe havens," said Deborah Bortner, NASAA president. "So scammers are pitching their investments as low risk and high return. That's an impossible combination. The higher the return, the higher the risk."

The rampant rate of securities fraud cost Americans billions of dollars each year, state security regulators estimate.

This year's "Top 10 Investment Scams" list has a number of repeat offenders such as broadly marketed promissory notes, bogus prime bank schemes and risky viatical (death-related) settlements, but the people selling them are moving out of the "boiler room" and onto Main Street, according to the NASAA.

"What's new is scammers are targeting independent life insurance agents to act as sellers," Bortner said. "While the vast majority of agents are doing what they should and looking out for their clients, a growing minority, lured by high commissions, are relying solely on marketing claims that are misleading or false."

The U.S. Securities and Exchange Commission has seen a large increase in the number of complaints about frauds such as the selling of long-maturity CDs under false pretenses.

"Most of the complaints follow a pattern. The investor wanted a one-year CD, but was sold a 'one-year non-callable CD' with a higher return," said Geraldine M. Walsh, special counsel to the SEC's Office of Investor Education. "These investors are shocked when they find out their CDs won't mature for 15, or 20, or even 30 years."

The SEC received 333 complaints last year about this CD scam, more than the agency received in the previous five years combined, Walsh said.

Here is the NASAA list of the top 10 scams, ranked by the organization in order of prevalence or concern:

1. Unlicensed individuals, such as life insurance agents, selling securities.

To verify that a person is licensed or registered to sell securities, call your state securities regulator. If the person is not registered, don't invest.

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. From "gifting" programs at some churches to foreign exchange scams targeted at Asian Americans, no group seems to be without con artists who seek to exploit others for financial gain.

3. Payphone and ATM sales.

In early March, 25 states and the District of Columbia announced actions against companies and individuals -- many of them independent life insurance agents -- that took roughly 4,500 people for $76 million selling coin-operated customer-owned telephones. Investors leased payphones for between $5,000 and $7,000 and were promised annual returns of up to 15 percent. Regulators say the largest of these investments appeared to be nothing but Ponzi schemes.

4. Promissory notes.

Short-term debt instruments issued by little-known or sometimes non-existent companies that promise high returns -- upwards of 15 percent monthly -- with little or no risk. These notes are often sold to investors by independent life insurance agents. In Indiana, 18 elderly investors lost some $1.4 million in a promissory note scam. An 80-year-old woman lost her life savings of $324,000. Interestingly, this is the scam that has been most used in Ponzi-scheme banking in Eastern Europe, notably Albania and Romania.

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. Roughly half the states have Internet surveillance programs that watch for fraud or investigate investor complaints.

6. Ponzi/pyramid schemes.

Always in style, these swindles promise high returns to investors, but the only people who consistently make money are the promoters who set them in motion, using money from previous investors to pay new investors. Inevitably, the schemes collapse.

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.

In Iowa, for example, a retiree in her 70's invested over $100,000 of her 97-year-old mother's money in three "callable" CD's with 20 year maturities. Her intention, she told her broker, was to use the money to pay her mother's nursing home bills. Regulators say sellers of callable CDs often don't adequately disclose the risks and restrictions.

8. Viatical settlements.

Originated as a way to help the gravely ill pay their bills, these financial interests in the death benefits of terminally ill patients are always risky and sometimes fraudulent. The insured person gets a percentage of the death benefit in cash; investors get a share of the death benefit when the insured dies. Because of uncertainties predicting when someone will die, these investments are extremely speculative.

9. Prime bank schemes.

Scammers 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 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.

10. Investment seminars.

Often 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. Regulators urge investors to be extremely skeptical about any get-rich-quick scheme.

(c) 2001 United Press International

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