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Monday, September 26, 2011

Investment Schemes Targeting You

Last week, DFI released its annual list of financial products and practices that threaten to trap unwary investors.

DFI urges investors to learn the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment.

DFI can help you with this by providing detailed background information about those who sell securities or give investment advice, as well as about the products being offered.

You can verify licenses of individuals selling investments online at or for more detailed background information call DFI at 1.877.RING DFI (746-4334).

The following products and practices threaten to trap investors who don't do their research. They are listed in alphabetical order.


Energy investments. Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.

Foreign Exchange (Forex) 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.

Gold and Precious Metal Investments. Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.

Promissory Notes and Real Estate 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. Unregistered promissory notes are often covers for Ponzi schemes and other scams. 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. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly.


Affinity Fraud. Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. A recent national study of Ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme's credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups, and ethnic groups. Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter.

Bogus or Exaggerated Credentials. State securities regulators have led the effort to prevent the misuse of credentials or designations intended to imply special expertise or training in advising senior citizens on financial matters. Since 2008, 29 states have adopted laws or rules preventing such misuse. Now, state regulators are noting an increase in the use of other bogus credentials or exaggerated designations. State securities regulators have encountered salesmen pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Others have boasted of impressive sounding designations that prove to be meaningless. In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials.

Private Placements Securities and Investment Advice Offered by Unlicensed Agents. State securities regulators have identified a consistent increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving investment advice or effecting securities transactions. For example, insurance agents offering securities or investment advice without a securities license have not demonstrated sufficient expertise to legally recommend that an investor liquidate securities holdings in favor of insurance products. Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.

Touting of Penny Stocks through Newsletters and Other Communications. Promoters of fraudulent investment schemes use newsletters and other communications to spread misinformation to artificially inflate the value of a stock before selling it in a “pump and dump” scheme.