Administrative Orders Issued
Weekly Securities Filings
|For Immediate Release
|Feburary 22, 2006
DFI Releases “Unlucky 13” List of Investor
Traps for 2006
(Madison) The Wisconsin Department of Financial Institutions (DFI) today
outlined a forecast of the 13 most common ways investors are likely to
be trapped in 2006.
“This list is anything but lucky,” Securities Division Administrator
Patricia Struck said. “Investment scams can be devastating for the
investor who falls victim, both financially and emotionally. Scams come
in many disguises, but they all share a common goal of separating victims
from their money. As regulators, we are especially concerned that as the
first of the Baby Boomers turn 60 this year they not become trapped in
bad investments as their retirement nears.”
Before making any investment, Struck urged investors to ask the following
questions: Are the seller and investment licensed and registered in Wisconsin?
Has the seller given you written information that fully explains the investment?
Are claims made for the investment realistic? Does the investment meet
your personal investment goals? Struck also urged investors to contact
the DFI with any questions about an investment product, broker or adviser,
before making an investment. “One phone call can save a lot of money
and misery,” she said. The number to call at DFI is 1-800-472-4325
While the traps below are listed alphabetically, Struck identified personal
information scams, oil and gas investment fraud, and prime bank schemes
as the greatest potential threats to investors this year.
Affinity Fraud. Con artists frequently target members
of closely knit religious, political, or ethnic groups. Their pitch is
essentially, “since I am like you and believe like you, you can
believe in me and in what I say.” When an investment is presented
in this context, the potential investor should be extremely wary. This
pitch seeks to substitute an emotional appeal for careful analysis and
Churning. This is an abusive sales practice in which
unethical securities professionals make unnecessary and/or excessive trades
to generate commissions for themselves. Most churning occurs when a broker
has discretion to trade the account without checking with the client prior
to completing a transaction.
Equity Indexed Certificates of Deposit. Remember the
days of FDIC-insured, bank-issued certificates of deposit with guaranteed
principal and interest? Equity Indexed CDs are not the
same product. These hybrid securities products offer an interest coupon
payment or return that is based on a stock market index, usually the S&P
500. Returns are not FDIC insured. They are dependent on the performance
of the stock market. These are complex securities that promise a rate
of return calculated over a defined period of time based upon some form
of securities market index. A declining stock market means the possibility
of no return on your investment. As a result, these products pose liquidity
problems and are therefore, not suitable for seniors who may need the
money for retirement living.
Oil and Gas Investment Fraud. High oil prices mean oil
and gas scams will continue to attract victims. Oil and gas deals are
complicated investments that generally require a significant investment,
often requiring a minimum deposit of thousands of dollars. Increasingly,
these deals are being promoted via the Internet with claims of attractive
tax advantages. Sales materials with “official-looking” surveyor
maps and “geologist” opinion letters touting the likelihood
that the “managers” of the drilling enterprise will hit pay
dirt are sent regularly to prospective investors more than 1,000 miles
from the region being “prospected.” Overall, these deals are
highly risky, but the lure of high profits often proves irresistible to
Personal Information Scams. The first step in separating
a victim from his or her money is convincing the victim to divulge personal
financial information. When the sales agent is a local tax preparer or
unaffiliated insurance agent, he or she enjoys a position of trust in
the community. Con artists not enjoying such a position of trust frequently
style themselves as “senior specialists” or adopt a pretext
of preparing “living will” or a “living trust.”
A ruse that is of current concern to insurance and securities regulators
is the offer to help senior citizens qualify for prescription benefits
by preparing forms. In the guise of filling out forms, the scammer may
ask unnecessary questions about personal financial assets. To the con
artist, this information provides a comprehensive laundry list of what
is available for the taking.
Prime Bank Schemes. These schemes often promise high-yield,
tax-free returns that are said to result from “off-shore trades
of bank debentures.” Investors are told that usually only very wealthy
people can get the benefit of these programs but the promoter is able
to make it available to the victim. Sometimes the victim is required to
execute a “confidentiality agreement” in order to invest and
is told not to consult an attorney, accountant or financial planner because
they keep these programs for the “big boys” and will deny
that they exist. There are no such programs, no such debentures and no
such high-yield trades. These prime bank schemes are the securities equivalent
of a purse snatch. Once the seller has your money, it’s gone “off
Pump and Dump Schemes. Unethical broker-dealers frequently
“pump” up the value of low-priced securities traded on the
NASDAQ “pink sheets” and then “dump” the stock
after naïve investors have purchased the stock at inflated prices.
The balloon breaks when the promoters no longer maintain the myth that
there is value in the shares and investors are left holding worthless
shares. These schemes frequently appear through unsolicited e-mail messages.
Recovery Rooms. Scam artists buy and sell the names and
financial information of victims who have lost money to “recovery
room” operators who promise, in return for a fee that the victim
must pay in advance, to recover the money lost in a worthless investment.
These “sucker lists” are bought by crooks who know that people
who have been deceived once are vulnerable to additional scams, especially
scams that give hope of recovering lost money. If you have been the victim
of a fraud, never give out your credit card or other personal information
to someone who contacts you with a promise to recover your money. In the
scam world this caller is known as a “reloader,” and he is
setting you up for a second bite at the apple.
Registered High-Interest Promissory Notes Publicly Advertised.
Generally, the higher the return promised, the greater the risk to your
money. A track record of paying high interest and repaying principal is
not an assurance that you will get your money back if the company fails.
These notes are not suitable for retirement funds.
Sale and Leaseback Contracts. In an attempt to avoid
the investor protections of securities laws, some investments are structured
to resemble the sale of a piece of equipment such as a payphone, ATM machine,
or Internet booth located at a remote venue where the investor cannot
service and maintain the equipment and must enter into a servicing agreement.
In order to make the deal more attractive, investors are told that after
a given period the equipment can be sold back to the seller at the investor’s
original purchase price. The investor is also promised a specific rate
of return. In a variant of this scheme, a real estate interest such as
a long-term lease in a resort community is sold instead of physical equipment.
Frequently the equipment or property does not exist and the seller lacks
the financial capacity to keep the promise of repurchase.
Self-Directed Pension Plans. Many types of securities
fraud require the victim to remove funds from legitimate investments such
as stock brokerage accounts, mutual funds, insurance policies, deferred
compensation plans, and mutual funds so that they can be invested in a
worthless scam. This scam may begin with advice to convert an employer-sponsored
pension into a self-directed pension plan. While these plans may serve
legitimate investment purposes, all too often they serve to benefit only
the scam artist.
Unsuitable Recommendations. Just as every investor is
different, so too are investments. What may be a suitable investment for
one investor may not be right for another. Securities professionals must
know their customers’ financial situations and refrain from making
recommendations of securities that they have reason to believe are unsuitable.
When securities professionals fail to live up to applicable ethical standards,
great harm can be done to individual investors.
Variable Annuities. Variable annuities are tax-deferred
investments that typically place mutual funds inside an insurance wrapper
for tax deferred potential investment growth. While these products are
legitimate investments, regulators are concerned about their popularity
in the sales community. Commissions to those who sell variable annuities
are very high, which provides incentive for sellers to engage in inappropriate
sales. Variable annuities are suitable for only a very small percentage
of the investing public and generally are not appropriate for most seniors.
The steep penalties for early withdrawals also make variable annuities
unsuitable for short-term investors. Be especially wary of any broker
who wants to sell you a variable annuity to hold inside a 401(k) or IRA.
You are already getting tax-deferred growth in an IRA or a 401(k), and
the variable annuity simply adds a layer of cost with no additional tax
Recognizing that financial education is a powerful weapon in the fight
against investment fraud, the DFI provides tips on how to detect con artists
and avoid becoming a victim on its website at www.wdfi.org.
To file a complaint about possible investment fraud, call 1-800-472-4325