The state Office of Financial and Insurance Services released the 10 most-likely frauds to be making the rounds in 2004 and warned investors that these swindles are becoming more multifaceted and confusing.
“Investors face a complex maze of scams, schemes and scandals,” said Linda Watters, OFIS commissioner.
“It pays to remember that if an investment opportunity sounds too good to be true, it usually is,” added Watters.
The North American Securities Administrators Association (NASAA), to which Watters belongs, compiled the list of potential frauds from its annual national survey of state securities enforcement officials. Topping that list is the timeless Ponzi scheme.
Named after Charles Ponzi, who bilked investors out of $10 million in the early 1900s, the scheme promises high returns on investments that are never made. Instead, money that comes from previous investors is used to pay more recent ones and to attract new ones.
Last year, a Tennessee attorney and a securities dealer from Mississippi pled guilty to 58 counts of investment fraud from a classic Ponzi scheme that cheated investors in four states out of $10.2 million.
But new to this year’s list are mutual fund practices and variable annuities.
“Our fight against fraud never stops because each year con artists discover new ways to fleece the public. Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings as well,” said Ralph Lambiase, director of the Connecticut Division of Securities and NASAA president.
Following Ponzi schemes on NASAA’s top 10 list, in order, were senior investment fraud, promissory notes, unscrupulous brokers, affinity fraud, insurance agents and other unlicensed securities sellers, prime bank schemes, Internet fraud, mutual fund business practices and variable annuities.
Even though many of the schemes may be old, like the prime bank scheme, perpetrators always seem to find new investors. Five Oklahoma men were convicted last year on charges stemming from a PB scheme in which 5,000 investors lost $14.6 million. Two California men were sent to prison last year for bilking 30 people out of $3.46 million. Also last year, the FBI reported that it had targeted 100 individuals involved in prime bank schemes that cheated investors out of $500 million.
A prime bank scheme promises vulnerable investors triple-digit returns via access to the portfolios of the world’s elite banks. A come-on often used in this standard ploy is that investors will get “risk-free guaranteed high-yield instruments.”
But it’s not just the stereotypical Hollywood con man that is using deceptive practices.
Last October, U.S. Bancorp Piper Jaffray agreed to pay $2.6 million to settle a complaint by the state of Montana, which accused the investment firm of unethical business practices and fraudulent securities dealing. State regulators accused a broker in the firm’s Butte office of making more than 6,000 unauthorized trades between 1997 and 2001.
Authorities said the broker generated commissions for himself and the firm, even though the trades turned conservative retirement accounts into risky portfolios. They said some trades were made for a customer who was in a coma, and more were made after he died.
Scandals in the mutual fund industry are drawing more complaints from investors, showing that some fund managers are putting their own interests ahead of their clients’. More than a dozen mutual funds are being investigated, others have been charged, some have settled with state regulators, and some have pled guilty to fraud.
Concerns surrounding variable annuities are that investors aren’t being told about high surrender charges and the steep commissions that agents earn when they move investors into these investments. Another is that investors are being misled into thinking that these annuities have fixed returns, when the returns are tied to the stock market.
“Variable annuities make sense only for consumers willing to invest for 10 years or longer, that they are not suitable for many retirees who cannot afford to lock up their money for a long time,” said Watters.
OFIS and NASAA offer information on how to avoid becoming a victim to these scams and how to file a complaint. Go to www.michigan.gov/ofis and click on the “Financial Direction” icon, or to www.nassa.org and click on the “Fraud Center” icon.
“Education and awareness,” said Watters, “are an investor’s best defense against fraud.”