Press Releases


For Immediate Release
January 14, 2004 Contact: Cheryl Weiss
(608) 264-7875

DFI Releases "TOP 10" Investment Scams, Schemes and Scandals

(Madison) The Wisconsin Department of Financial Institutions (DFI) cautioned investors of potential investment scams. Officials have identified what they consider the top 10 schemes investors are likely to see in 2004. New to this year's list are mutual fund practices, senior investment fraud, and telemarketing fraud.

"Investors face a complex maze of scams, schemes and scandals," said Lorrie Keating Heinemann, Secretary of the Department of Financial Institutions. "Each year con artists discover new ways to fleece the public. If an investment opportunity sounds too good to be true, it usually is."

State officials in Wisconsin are doing a number of things to protect Wisconsin investors. Patricia Struck, Administrator of the Division of Securities at DFI and a member of North American Securities Administrators Association ("NASAA"), is unveiling a new interactive fraud center on the NASAA website (www.nasaa.org).

The center features details of the Top 10 scams, schemes and scandals; tips on how to detect con artists and avoid becoming a victim; an Investor "Bill of Rights;" instructions on how to file an investment-related complaint; and contact information for each state securities regulator. "Education and awareness are an investor's best defense against fraud," Struck said.

The following list, is based on a survey of state securities regulators conducted by the North American Securities Administrators Association and DFI's experience with Wisconsin investors.


1. PONZI SCHEMES. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors did not get their promised returns.

2. SENIOR FRAUD. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior investors. State securities regulators said older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns. To learn more, visit NASAA's Senior Investor Resource Center at http://www.nasaa.org/nasaa/sirc/sirc.asp.

3. PROMISSORY NOTES. A long-time member of the Top 10 list, these short-term debt instruments often are issued by little known or non-existent companies promising high returns - upwards of 15 percent monthly - with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.

4. UNSCRUPULOUS BROKERS. Despite the stock market's rebound in 2003, state securities regulators say they are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. "I give credit to the increasing numbers of investors who are giving their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities," Struck said.

5. AFFINITY FRAUD. Con artists know that its only human nature to trust people who are like yourself. That's why scammers often use their victim's religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud.

6. UNLICENSED SECURITIES SELLERS. Fraudulent and high-risk investments, such as promissory notes, ATM and payphone investment contracts, and viatical settlements continue to be sold by unlicensed individuals. "Scam artists continue to entice independent agents into selling investments they may know little about," Struck said. The person running the scam instructs the independent sales force -sometimes investment advisers and accountants - to promise high returns with little or no risk. Please call the DFI Division of Securities at (608)266-1064 to check the status of a securities seller's license.

7. PRIME BANK SCHEMES. Another perennial favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as "risk free guaranteed high yield instruments" or something equally deceptive.

8. INTERNET FRAUD. With the Internet a common part of daily life for increasing numbers of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyber frauds took in $122 million in 2002, according to the Federal Trade Commission. "The Internet has turned from an information superhighway to a road of ruin for victims of cyber fraud," Struck said. "Many of the online scams regulators see today are merely new versions of schemes that have been fleecing offline investors for years." Struck also warned investors to ignore e-mail offers from individuals representing themselves as Nigerian or West African government or business officials in need of help to deposit large sums of money in overseas bank accounts. "Don't be dot.conned. If you get an e-mail pitching a deal that can't be beat, hit delete," she cautioned.

9. MUTUAL FUND BUSINESS PRACTICES. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America's 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators. "These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders," Struck said. "We will continue to actively pursue inquiries into mutual fund improprieties and are committed to aggressively addressing mutual fund complaints raised by investors in our jurisdiction," she added.

10. TELEMARKETING FRAUD. Nationwide, hundreds of "boiler rooms," or high-pressure telephone sales operations, peddle illegal or fraudulent investment products. Struck said, "These individuals will gladly accept the life savings of elderly persons who will never be able to recoup their loss. Many victims must return to the work force instead of enjoying the comfortable retirement they deserve, and the stress of their losses can have a deep impact on their emotional and physical well-being. As always, we encourage everyone to investigate before they invest."