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5 Common Investment Scams

A combination of a volatile stock market and plunging home sales is a fraud scammer’s paradise, creating a prime opportunity to take advantage of skittish investors, particularly seniors and the elderly. Watch out for investment scams.

According to the Securities and Exchange Commission (SEC), the Financial Industry Regulatory, the Better Business Bureau, and state regulators, some of the most common financial fraud scams include the following:

Oil & Gas Partnerships: Investment deals involving oil and gas partnerships have been around for years. In 2009, one of the biggest fraud cases came into the spotlight when the SEC filed securities fraud charges against Texas-based Provident Royalties LLC and three company founders. According to the SEC, Provident made a series of fraudulent securities offerings to at least 7,700 investors, who lost some $485 million in the deals. Among other things, Provident and the broker/dealers that marketed and sold the phony offerings, promised investors annual returns of more than 18%, as well as misrepresented how investors’ funds would be actually be used.

Ponzi or Pyramid Schemes. Bernie Madoff, who orchestrated the biggest Ponzi fraud in U.S. history until his arrest in December 2008, gave a whole new meaning to Ponzi schemes. Madoff defrauded thousands of investors out of $66 billion by promising huge profits and paying off early investors with funds from subsequent clients. Like all Ponzi schemes, Madoff’s ruse eventually collapsed when enough investors decided to pull out their money.

Promissory Notes & Private Placements. Promissory notes are investment deals that offer above-market, fixed returns. Some of these investments are legitimate, while others are blatantly fraudulent. One of the more recent cases involving the latter is that of Medical Capital Holdings. In the summer of 2009, the SEC filed fraud charges against Medical Capital in connection to $77 million of private placement sales. In its complaint, the SEC said Medical Capital lied to backers, misappropriated millions of dollars of investors’ money and failed to disclose information about $1.2 billion in outstanding notes and $993 million in notes that had entered default.

Free Lunch Seminars. Many people, but especially seniors, fall prey to scammers who use “free-lunch seminars” to lure people to invest in unsuitable or even fraudulent investments or financial deals. The free lunch and discussions often take place at upscale hotels, restaurants, retirement communities and golf courses. According to the SEC, the sponsoring firm or individual usually provides a free meal, door prizes, books, and offers of free vacations to encourage attendance. The real purpose of the meetings is to get attendees’ to open new accounts or invest in a specific product. The most commonly discussed products at these types of meetings include private placements, variable annuities, real estate investment trusts (REITs), equity-indexed annuities, mutual funds, oil and gas interests, and reverse mortgages, the SEC says.

High-Yield Investment Programs.  Also known as HYIPs, these scams are often marketed online through YouTube, Twitter and Facebook. According to FINRA – which recently issued a warning on HYIPs – the scams involve unregistered investments created and touted by unlicensed individuals. Typically, the offer is done via a sophisticated Web site that promises investors safety coupled with high, unsustainable rates of return of 20%, 30%, or 100% or more per day. Some HYIP scammers also tout “winning” HYIP investment strategies or provide a forum for trading tips on how to profit from HYIPs. The Federal Bureau of Investigation recently reported that the number of new investigations involving HYIPs during fiscal year 2009 increased 105% over fiscal year 2008.


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