Press Releases

"Top 10" Investment Frauds listed by Wisconsin Department of Financial Institutions

(Madison) - Wisconsin Department of Financial Institutions (DFI) released a list of the "Top 10" scams, risky investments or sales practice abuses they are fighting. New to the third annual list are unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.

"Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street," said DFI Secretary, John F. Kundert. "Con artists know investors are concerned about low interest rates on fixed investments and volatility in the stock market, so they pitch their scams as safe alternatives and promise high returns - an impossible combination."

The federal war on terror and large budget deficits at the state level are diverting or pinching resources to fight investment fraud, Patricia Struck, DFI Securities Administrator warned.

"Putting people in jail gives investors the biggest bang for their regulatory buck," said Struck. "So legislators at all levels need to ensure that prosecutors have sufficient resources to successfully bring securities cases."

Here are the "Top 10" investment scams, ranked roughly in order of prevalence or seriousness:

1. Unlicensed individuals, such as independent insurance agents, selling securities. In hundreds of cases from Washington to Florida, scam artists are using high commissions to entice independent insurance agents into selling investments they may know little about. The person running the scam instructs the independent sales force - usually insurance agents but sometimes investment advisers and accountants - to promise high returns with little or no risk.
   To verify that a person is licensed or registered to sell securities, call DFI's Division of Securities at
   1-800-47CHECK. If the person is not registered, don't invest.
2. Unscrupulous stockbrokers. The declining stock market has caused some brokers to cut corners or resort to outright fraud. In addition, some investors have grown more cautious and are scrutinizing their brokerage statements for unexplained fees, unauthorized trades or other irregularities.
3. Analyst research conflicts. In May, the New York Attorney General's office concluded a 10-month investigation into whether Merrill Lynch had issued misleading research reports by entering into a settlement agreement with the firm. Under the agreement, Merrill Lynch agreed to pay a $100 million fine and make significant changes to way it does business. NASAA is assisting a multi-state task force investigating conflict of interest issues at Wall Street firms. The primary focus of the ongoing investigation is to determine whether analysts issued glowing research reports and made buy recommendations in order to win investment banking business.
4. Promissory notes. These are short-term debt instruments often sold by independent insurance agents and issued by little-known or non-existent companies promising high returns - upwards of 15 percent monthly - with little or no risk.
   "A 12 percent return may not seem over-the-top by bull market standards, but it's far more than banks are offering right now for insured deposits," said Patricia Struck
5. Prime banks. 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.
6. 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 and 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. In a new twist, Pennsylvania regulators say "senior settlements" - interests in the death benefits of healthy older people - are now being offered to investors.
7. Affinity 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 take advantage of the trust of others.
8. Charitable gift annuities. These annuities are transfers of cash or property to a charitable organization. The value of the annuity is less than the value of the cash or property, with the difference constituting a charitable donation. While most annuities offered by charitable organizations are legitimate investments, investors should be cautious of little-known organizations or those that provide only sketchy information.
9. Oil and gas schemes. These scams follow the headlines, rising in frequency with predictions of oil shortages or a rise in gas prices.
10. Equipment leasing. While the vast majority of equipment leasing deals are legitimate, thousands of investors have been scammed by individuals selling interests in payphones, ATMs or Internet kiosks. In a typical equipment leasing scam, a company sells a piece of equipment through a middleman. As part of the sale, the company agrees to lease back and service the equipment for a fee. Investors are promised high returns with little or no risk. But DFI say high commissions paid to salesmen and promised returns that are unrealistically high doom many projects.

Before investing, DFI urges investors to call and ask if the individual selling the investment is licensed to do so. DFI says investors can also save themselves a lot of grief by asking a second question - whether the investment itself is registered. To check out an investment or salesperson, contact the Wisconsin Department of Financial Institution Division of Securities at 1-800-47CHECK or visit DFI's Website at: www.wdfi.org.