NC Secretary of State Identifies Traps
August 24, 2010 - RALEIGH - The North Carolina Secretary of State’s Office today released its annual list of traps that cautious investors should avoid when seeking to jump-start their investment portfolios
as the impact of the financial crisis and increased stock market volatility continues. NC Secretary of State Elaine F. Marshall said that investors rebuilding nest eggs damaged by stock market drops as well as those frustrated with low interest rates are particularly at risk of succumbing to speculative investments that most often turn a promise of profit into thin air.
“Ramping up your knowledge, paying attention to detail and keeping a healthy sense of skepticism are the proactive ways to fight investment fraud,” Secretary Marshall said. “State securities regulators provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered. The more you prepare before you invest, the better your chance of sidestepping a trap that can leave you in a financial hole for many years.”
Top 10 Investor Traps of 2010
The following products and practices deserve special scrutiny:
Products
· Green Schemes. Investment opportunities tied to the development of new energyefficient
“green” technologies are increasingly popular with investors and scammers
alike. Scammers also exploit headlines to cash in on unsuspecting investors, whether
from investments related to the clean-up of the Gulf of Mexico oil spill or the rising
national interest in environmental innovations tied to “clean” energy, such as wind
energy, wave energy, carbon credits and other alternative energy financing.
· Oil and Gas Schemes. Regardless of the price at the pump, fraudulent energy promoters
continue to capitalize both on interest in the commodity and on oil and gas as investment
alternatives to the stock market. Oil and gas investments tend to be highly risky and
unsuitable for traditional, smaller investors who cannot afford the risk. Securities
investments offering profit participation in oil and gas ventures can be legitimate, but
even when the underlying project is genuine, any revenues realized can be absorbed by
high sales commissions paid to the promoter and dubious “expenses” skimmed off by the
managing partner. Some promoters, many of whom have had past run-ins with regulators,
have attempted to structure their “joint ventures” or “general partnerships” to avoid
securities regulation and deprive investors of important protections.
· Exchange-Traded Funds (ETFs). While ETFs resemble mutual funds in many respects,
some, such as leveraged and inverse ETFs, may contain hidden traps and complexities,
and may consist of highly leveraged bundles of exotic financial instruments, including
options and other derivatives. Given their potential for volatility, leveraged ETFs may not
be suitable for most retail investors. These types of ETFs are primarily designed for
short-term trading (such as day-trading), and not for buy-and-hold strategies. Also be
aware that some ETFs are thinly traded and may not always be liquid.
· Foreign Exchange Trading Schemes. Currency trading and foreign exchange (forex)
trading schemes can be particularly harmful to unsuspecting investors. Trading in foreign
currencies requires resources far beyond the capacity of most individual investors.
Promoters profit by charging high commissions or selling investment strategies assuming
that trades are actually made. In some instances, salesmen and promoters who claim to
have complex algorithms or propriety software programs which allow them to beat the
market are actually just running Ponzi schemes. Too often, state regulators have
encountered situations where there are no trades; the money is simply stolen.
· Gold and Precious Metals. High gold prices have trapped some investors in gold bullion
scams in which a seller offers to retain “purchased” gold in a “secure vault” and promises
to sell the gold for the investor when it gains in value. In many instances the gold does
not exist. Investors have also been harmed by promoters pitching investment pools in
precious metal commodities and gold mines.
Investors should also stay alert for the following bad practices:
· Affinity Fraud. Scam artists have found it lucrative to abuse membership or association
with an identifiable group to convince a potential investor to trust the legitimacy of the
investment. Typical affinity groups include religious, ethnic, professional, educational,
language, age and any other group with shared characteristics that allow investors to trust
members of the group. Rather than trusting a person or company due to a common
affiliation, investors should seek further information about the investment from an
unbiased, independent source and review both the promises and risks.
· Undisclosed Conflicts of Interest. When obtaining investment advice about securities,
investors need to know that not all advice is given with their best interest at heart. Some
salespeople can receive lucrative commissions when they sell a product that is risky or
inappropriate for an investor, but don’t have to disclose that financial incentive. Investors
should demand that anyone giving advice or recommendations disclose how they are
compensated.
· Private or Special Deals. Some investors encounter investment opportunities or deals
couched as “private” or only for “special” clients. While securities laws do offer
businesses the opportunity to raise capital by selling securities to a relatively small
number of investors in a non-public offering, these securities are not subject to the same
review as others. Many state securities regulators have seen continued or increased abuse
of fraudulent private offerings made under federal exemptions or not regulated at all.
Although properly used by many legitimate issuers, private offerings have become an
attractive option for con artists looking to steal money from investors by promoting the
special or private nature of these schemes and by making false and misleading
representations.
· “Off the Books” Deals. “Off the books” sales are an increasingly common threat to
investors. Be cautious if your broker offers an investment on the side instead of one sold
through his or her employer. These “off books” investments may not only be illegal, but
they can also be especially risky without the oversight and supervision of the broker’s
employer.
· Unsolicited Online Pitches. Promoters of fraudulent investment schemes are moving
beyond e-mail and turning to social media and online communities, such as Facebook,
Twitter, Craigslist and YouTube to solicit unsuspecting investors. Some may use these
sites to spread misinformation to artificially inflate the value of stock before selling in a
“pump and dump” scheme. Others may promise high-yield, tax-free returns from
investments in offshore markets. Once the money is sent to another country and is in
someone else’s control, investors may not be able to get it back. In many cases, these
offers turn out to be Ponzi schemes. Investors should approach any unsolicited
investment opportunity with suspicion.
Secretary Marshall cautioned investors to familiarize themselves with the warning signs of
investment fraud and independently verify any investment opportunity as well as the background of
the person and company offering the investment. “Investors should do business with licensed
brokers and advisers and should report any suspicion of investment fraud to us,” Marshall said.
“One call can protect your financial security and might prevent others from becoming victims of a
scam.”
For more information, contact the NC Secretary of State Securities Division at 1-800-688-
4507, or visit the agency’s website at www.socnc.com.
(NCSOC Press Release)