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Tuesday, August 3, 2010

Top Traps Washington Investors Should Watch For

Today our office released its annual list of investment traps that Washington investors should beware of.

Securities Administrator Bill Beatty said investors rebuilding nest eggs damaged by the market collapse as well as those frustrated with low interest rates are particularly susceptible to speculative investments that most often turn a promise for profit into thin air.

“Investors should do business with licensed brokers and advisers and should report any suspicion of investment fraud to us,” Beatty said. “One call can protect your financial security and might prevent others from becoming victims.”

DFI Director Scott Jarvis agrees, and offers some advice.

“Investors can never let down their guard,” Jarvis explained. “There will always be someone out there more than happy to separate investors from their money. One way Washington investors can stay on top of who’s out to get their money and scams to watch for is to sign up for DFI’s regular scam alerts.”

Sign up for regular scam alerts from the Washington DFI.

Before making any investment, DFI recommends that you check to make sure that both the investment and the salesperson is registered and licensed in Washington by calling 360-902-8700 or 1-877-RING DFI (746-4334).

Traps to beware of:


  • Green Schemes
    Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers alike. Scammers also exploit headlines to cash in on unsuspecting investors, whether from investments related to the clean-up of the Gulf of Mexico oil spill or the rising interest in environmental innovations tied to “clean” energy, such as biodiesel, ethanol, wind energy, solar energy, carbon credits and other alternative energy financing.
  • Promissory Notes, Deeds of Trust, Real Estate Investment Schemes
    Promissory notes are an important means by which companies raise capital. Unfortunately, there have been many instances of unscrupulous individuals pushing bogus promissory notes. While fraudulent promissory notes appear to give investors the two things they desire most — higher returns and safety — they may not be worth the paper they’re printed on. Promoters may claim the investment has little risk, because the promissory note is secured by a deed of trust, but such investments are rarely without risk. For example, the promoters may fail to record the deed of trust for the investors’ collateral or the total amount of funds secured by the deeds of trust may far exceed the value of the property. Remember, all investments involve some form of risk – only invest what you can afford to lose.
  • Foreign Exchange Trading Schemes
    Currency trading and foreign exchange (forex) trading schemes can be particularly harmful to unsuspecting investors. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment strategies assuming that trades are actually made. In some instances, salespersons and promoters who claim to have complex algorithms or propriety software programs which allow them to beat the market are actually just running Ponzi schemes. Too often, state regulators have encountered situations where there are no trades; the money is simply stolen.
  • Oil and Gas Schemes
    Regardless of the price at the pump, fraudulent energy promoters continue to capitalize both on interest in the commodity and on oil and gas as investment alternatives to the stock market. Oil and gas investments tend to be highly risky and unsuitable for traditional, smaller investors who cannot afford the risk. Securities investments offering profit participation in oil and gas ventures can be legitimate, but even when the underlying project is genuine, any revenues realized can be absorbed by high sales commissions paid to the promoter and dubious “expenses” skimmed off by the managing partner. Some promoters, many of whom have had past run-ins with regulators, have attempted to structure their “joint ventures” or “general partnerships” to avoid securities regulation and deprive investors of important protections.


  • Private or Special Deals
    Some investors encounter investment opportunities or deals couched as “private” or only for “special” clients. While securities laws do offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors in a non-public offering, these securities are not subject to the same review as others. Many state securities regulators have seen continued or increased abuse of fraudulent private offerings made under federal exemptions or not regulated at all. Although properly used by many legitimate issuers, private offerings have become an attractive option for con artists looking to steal money from investors by promoting the special or private nature of these schemes and by making false and misleading representations.
  • Affinity Fraud
    Scam artists have found it lucrative to abuse membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Typical affinity groups include religious, ethnic, professional, educational, language, age and any other group with shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation, investors should seek further information about the investment from an unbiased, independent source and review both the promises and risks.