State Warns Of Top 10 Investor Traps

FRANKFORT, Ky. – The annual list of the Top 10 Investor Traps is out with a warning from the Kentucky Department of Financial Institutions to be wary of offers that seem “too good to be true.”

Shonita Bossier, the department’s securities division director, urges investors who are feeling pressure from the struggling economy to resist the lure of “too good to be true” offers of making money quickly or “guaranteed” returns.

“An educated investor should be alert at all times. Falling into an investment trap makes it harder to get back on solid financial ground,” Bossier said in a release issued by the department.

This year’s list identifies natural resources investments, Ponzi schemes, leveraged exchange-traded funds (ETFs), real estate investment schemes and private placement offerings as the greatest potential threats to Kentucky investors.

The list is based on scams and traps that DFI examiners have seen in Kentucky and across the United States and is compiled by the Enforcement Trends Project Group of the North American Securities Administrators Association, of which DFI is a member. Many promise high returns to cash-strapped investors but provide little, if any, disclosure of risks.

“When it comes to investing, verify everything and everyone before you part with your money,” Bossier said. “Call DFI to make sure the person and product are registered and that no complaints have been filed. Research the investment, and make sure you understand all the terms. Information is an investor’s best defense against securities fraud.”

To verify a product and seller’s registration and complaint history, call the DFI Securities Division at (800) 223-2579. For more information on how to invest, including free brochures, links and games, visit www.kfi.ky.gov/public/invest.htm.

---

The Top 10 Investor Traps

1. Natural Resource Investment Scams. The Kentucky Department of Financial Institutions (DFI) expects to continue to see a rise in energy and precious metals scams promising quick, high returns. Investors may be hooked by oil and gas schemes, as well as fraudulent offerings of investments tied to natural gas, wind and solar energy, and the development of new en-ergy-efficient technologies.

2. Ponzi Schemes. Despite the heightened aware-ness of Ponzi schemes following Bernard Madoff’s 150-year prison sentence for multi-billion dollar fraud, these scams continue to trap investors. The Ponzi scheme is a house-of-cards swindle in which high returns are paid to initial investors out of the funds of later investors, who end up losing all or most of their money to the promoter. Beware of investment opportunities promising high and steady rates of return.

3. Leveraged Exchange-Traded Funds (ETFs). This relatively new financial product has been offered to individual investors who may not be aware of the risks. The funds, which trade throughout the day like a stock, use exotic financial instruments, including op-tions and other derivatives, and promise the potential to provide greater-than-market returns as the value of the underlying assets rise or fall. These volatile funds typi-cally are not suitable for most retail investors.

4. Real Estate Investment Schemes. State se-curities regulators have noted a rise in scams disguised as offers to help homeowners “save” their homes or “fix” their mortgages, usually in exchange for a fee paid in ad-vance. Advance-fee offers only generate a quick profit for the con artist and provide no benefit to the consumer. And while reverse mortgages are legitimate lending products, some unscrupulous salesmen try to convince consumers to inappropriately invest the funds.

5. Private Placement Offerings. Private place-ments allow businesses to raise capital by selling securities to a relatively small number of investors instead of a public offering made through national securities markets. Regula-tors have observed a significant rise in the number of pri-vate placement offerings that are later discovered to be fraudulent, especially those made under a federal registra-tion exemption (Regulation D, Rule 506). Companies using this exemption can raise an unlimited amount of money without registering the offering as long as they meet certain standards. Although properly used by many legitimate issu-ers, the exemption has become an attractive option for con artists and those barred from the securities industry.

6. Short-term Commercial Promissory Notes. Short-term commercial promissory notes that are nine months or less in duration may be touted as being “insured” or “guaranteed,” but the insurance com-panies generally are located outside of the United States, are not licensed to do business in the United States, and lack the resources necessary to deliver on the promised guarantees. Unlike publicly advertised promissory notes, promoters of these notes usually at-tempt to use commercial paper exemptions as a basis for selling the products without registration. The com-mercial paper exemptions apply only to high-grade com-mercial paper traded by major corporations – not to these risky notes pushed to the public by a sales force paid with extremely high commissions.

7. Life Settlements. The rising popularity of life set-tlements, or viaticals, among investors has prompted a recent congressional investigation. While life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits come at a high price for investors, particularly seniors. Wide-ranging fraudulent practices in the life set-tlement market include Ponzi schemes; fraudulent life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk.

8. Gold Bullion and Currency Scams. With the high price of gold, investors should beware of gold bullion scams in which the seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor as it gains in value. In many instances the gold does not exist. Similar are the many forms of foreign exchange (forex) trading schemes. Trad-ing in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling invest-ment strategies assuming that trades are actually made. In many instances there are no trades; the money is sim-ply stolen.

9. Entertainment Investments. These unregis-tered investments, encompassing a variety of products including movies, infomercials, internet gambling and pornography, promise high returns while offering little disclosure of risk.

10. Speculative Inventions and New Products. New products are for venture capitalists who know how to assess the risks. They are not good retirement invest-ments, even though they may promise high returns