“A con artist will use every trick in the book to take advantage of unsuspecting investors, including exploiting well-intended laws, in order to fatten their wallets.”
– NASAA Past-President Jack E. Herstein
“There’s a sucker born every minute.”
Although widely attributed to the 19th century showman P.T. Barnum, the above oft-referenced quote was actually delivered by Barnum’s main competitor, George Hull of Binghamton, New York. While Hull played his elaborate scam of discovering a giant back in 1869, there are no less sophisticated cons at work this very minute.
The North American Securities Administrators Association cautions investors about the following top investor threats from 2012. In true David Letterman fashion, let’s count down the Top Ten:
10. Unlicensed Salesmen Giving Liquidation Recommendations. As in years past, the liquidation of securities by insurance-licensed firms or agents who are not registered to sell securities is a significant source of complaints and inquiries for the states.
9. Regulation D Rule 506 Private Offerings. In the most recent survey of state securities regulators, fraudulent private placement offerings were ranked as the most common product or scheme leading to investigations and enforcement actions. The 2012 JOBS Act significantly relaxed the restrictions on the manner in which Regulation D Rule 506 offerings can be marketed to the general public, eliminating the previous ban on general solicitations (advertising).
8. Real Estate Investment Schemes. As news of a possible bottom being reached in the U.S. housing market has spread, the popularity of investment offerings involving distressed real estate has continued to increase. In a recent survey of the states, real estate fraud was ranked as the third most common product or practice leading to investigations and enforcement actions. As with all investments, careful vetting and due diligence is a must with real estate investments.
7. Promissory Notes. Promissory notes are often promoted as a safe and secure way for investors to earn returns in excess of those prevailing on conventional investments. But issuers often use notes and prior relationships with investors to downplay the true nature and risk of these investments. Sales of promissory notes are very often the favored investment vehicle for Ponzi schemes.
6. Risky Oil and Gas Drilling Programs: In a recent survey of the states, oil and gas fraud was ranked as the fourth most common product or practice leading to investigations and enforcement actions. Investors should therefore conduct thorough due diligence and appraise their own tolerance for considerable risk when considering the purchase of interests in oil and gas programs.
5. Gold and Precious Metals: The hype surrounding gold, silver and other precious metals continues despite both the fact that these investments are just as vulnerable to risk as others, and signs that some precious metal markets are declining or increasingly turbulent.
4. EB-5 Investment-for-Visa Schemes: The Immigrant Investor Program, also known as EB-5, is an immigration program linked to job-creation that is growing in popularity, but investors must beware of promoters who falsely claim that an investment in their venture is safer or guaranteed due to an influx of foreign cash. The EB-5 immigration category is a 20-year-old program that grants a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise (The equivalent Canadian Immigrant Investor Program (IIP), requires a C$800,000 investment).
3. Scam Artists Using Self-Directed IRAs to Mask Fraud: Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. Fraudsters also exploit the tax-deferred characteristics of self-directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means.
Self-directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities; financial and other information necessary to make a prudent investment decision may not be as readily available for these alternative investments.
2. Inappropriate Advice or Practices from Investment Advisers: The 2010 Dodd-Frank Act laid the groundwork for a major regulatory shift, transferring thousands of mid-sized investment advisers to primary supervision by state regulators, rather than the SEC. As the states implement regular examination schedules and analyze investment advisers that have not been audited in many years, more problems are likely to be discovered.
1. Crowdfunding and Internet Offers: Many states and provinces report a recent increase in active investigations or recent enforcement actions involving Internet fraud, and JOBS Act-triggered activity is likely to elongate this trend. Investors must remember that small startups are among the riskiest of investment categories under the best of situations.
Certainly there are plenty of very reputable and qualified professionals engaging in business in these top ten segments. Similarly there are plenty of unscrupulous individuals playing cons outside of these segments as well. What is the key? Ask a lot of questions. If you do not fully understand the program, stay away. Get referrals from people whom you can independently verify as being credible and reputable. Be careful, CAVEAT EMPTOR. . . and always navigate accordingly.
I would welcome hearing from people with personal experiences in these scams or others so we all may learn as we collectively navigate the economic landscape.