2006 Dirty Dozen Scams & Schemes

April is Saving & Investing Month, a time when the Arizona Corporation Commission places increased emphasis on investor education to help protect investors from scams & schemes. The Commission has outlined the 12 most common ways Arizonans are likely to be trapped when investing in 2006.

Affinity Fraud. Con artists frequently target members of closely knit religious, political, or ethnic groups. Their pitch is essentially, “since I am like you and believe like you, you can believe in me and in what I say.” When an investment is presented in this context, investors should be extremely wary. This pitch seeks to substitute an emotional appeal for careful analysis and critical thought. For an example, click on: http://www.azinvestor.gov/news/2003/sept19b-03.pdf.

Dishonest & Unethical Financial Professionals. Although most financial professionals are honest, some do make mistakes or worse yet, take advantage of your trust. It may start with having you sign a blank account form that the salesperson fills in later to his or her advantage. Unscrupulous professionals primarily focus on lining their own pockets by generating excessive commissions or forging your signature in order to take your money. For an example, click on: http://www.azinvestor.gov/News/2005/dec05-05.pdf.

High-Interest Promissory Notes. Generally, the higher the return promised, the greater the risk to your money. A track record of paying high interest and repaying principal is not an assurance that you will get your money back if the company fails. These notes are not suitable for retirement funds. For an example, click on: http://www.azinvestor.gov/News/2004/oct15-04.pdf.

Investments Secured by Insurance. Most people are familiar with the secure feeling that an insurance policy can provide for their home, health and automobile in light of a possible financial loss. Con artists and unscrupulous promoters may capitalize on this notion and offer investments with the same guarantees. The investor should not rely on verbal and written statements provided by the promoter and should verify these claims with regulators. For an example, click on http://www.azinvestor.gov/News/2005/nov04-05.pdf.

Oil & Gas Investment Fraud. High oil prices mean oil & gas scams will continue to attract victims. Oil & gas deals are complicated investments that generally require a significant investment, often requiring a minimum deposit of thousands of dollars. For an example, click on: http://www.azinvestor.gov/News/2006/mar02a-06.pdf.

Personal Information Scams. The 1st step in separating a victim from his or her money is convincing the victim to divulge personal financial information. When the sales agent is a local tax preparer or insurance agent, he or she enjoys a position of trust in the community. But these professionals can betray that trust to take advantage of unwary investors. Con artists frequently adopt a pretext of preparing a “living will” or a “living trust” to gain useful asset information. In the guise of filling out forms, the con artist may ask unnecessary questions about personal financial assets. To the unscrupulous promoter, this information provides a wedge into someone’s wallet. For an example, click on: http://www.azinvestor.gov/News/2004/jan30b-04.pdf.

Prime Bank Schemes. These schemes often promise high-yield, tax-free returns that are said to result from “off-shore trades of bank debentures.” Investors are told that only very wealthy people can get the benefit of these programs but the promoter is able to make it available to the victim. Once the seller has your money, it’s gone “off shore” and is difficult to retrieve. For an example, click on: http://www.azinvestor.gov/news/2002/sept27-02.pdf.

Real Estate Investment Contracts. Rising property values can attract investors who view real estate as a “sure thing,” one that has little downside risk with the potential of substantial returns. Promoters capitalizing on this mindset can create real estate investment opportunities that sometimes become subject to the full weight of state securities regulation, including registration requirements & antifraud rules. For an example, click on: http://www.azinvestor.gov/News/2006/feb03-06.pdf.

Sale & Leaseback Contracts. In an attempt to avoid the investor protections of securities laws, some investments are structured to resemble the sale of a piece of equipment such as a payphone, ATM machine or Internet booth located at a remote venue where the investor cannot service and maintain the equipment and must enter into a servicing agreement. In order to make the deal more attractive, investors are told that after a given period the equipment can be sold back to the seller at the investor’s original purchase price. For an example, click on: http://www.azinvestor.gov/News/2005/Feb15-05.pdf.

Senior Specialists. Individuals calling themselves “senior specialists” & other designations can create a false sense of security among investors. In some cases, these special designations consist of training that involves nothing more than marketing techniques & sales tips for certain investment products being targeted to seniors. For more information, click on: http://www.azinvestor.gov/News/2005/dec14-05.pdf.

Unsuitable Recommendations. What may be a suitable investment for one investor may not be right for another. Securities professionals must know their customers’ financial situations & refrain from making recommendations of securities that they have reason to believe are unsuitable. When securities professionals fail to live up to applicable ethical standards, great harm is done to individual investors. For an example, click on: http://www.azinvestor.gov/news/2003/dec23-03.pdf.

Variable Annuities. Variable annuities are tax-deferred investments typically placed in mutual funds that provide investors with periodic payments plus a death benefit. While these products are legitimate investments, regulators are concerned about their popularity in the sales community. Commissions to those who sell variable annuities are very high, providing the incentive for sellers to engage in inappropriate sales. The steep penalties for early withdrawals, known as “surrender charges,” also make variable annuities unsuitable for short-term investors. Be wary of any salesperson who wants to sell you a variable annuity to hold inside a 401(k) or IRA. You are already getting tax-deferred growth in an IRA or a 401(k), so the variable annuity may add a layer of cost with no additional tax benefit. For an example, click on: http://www.azinvestor.gov/News/2005/oct20-05.pdf.