Beware of a con artist's promise of riches - DOLLARS & SENSE


May 06, 2001|By EILEEN AMBROSE

IT'S IN TIMES like these that investors become more vulnerable than usual to investment scams.

The volatile stock market and lower interest rates make investors susceptible to con artists' promises of high returns with little or no risk.

Investors frequently have their guard down, too, because they became accustomed to healthy double-digit returns during the 1990s bull market, said Deborah Bortner, president of the North American Securities Administrators Association.

"When they hear you can make 15 percent guaranteed, they are not too surprised," she said. "Ten years ago maybe, they would have said, `That's too good to be true.'"

Often, the target is older investors who may have hefty nest eggs or are anxious to boost their fixed income. And some older Americans are more likely to listen to a scam artist's pitch because they are lonely, too trusting or too polite, experts said.

"They grew up in an age when you weren't suspicious about your neighbor and people who came to the door. You didn't hang up the phone on somebody," said Sue Ward, secretary of Maryland's Department of Aging.

The securities administrators group recently released the top 10 investment scams that regulators are fighting nationwide.

New to the annual list are "callable" certificates of deposit sold to older investors and schemes to invest in pay phones and ATMs.

Callable CDs are generally sold through large, legitimate firms, but problems occur when sellers don't reveal all the risks or restrictions, particularly to elderly investors, Bortner said. The CDs generally mature in 10 to 20 years, but can be redeemed after a year, Bortner said.

What investors aren't told is that it's the bank - not the investor - that can cash in the CDs early, she said. When investors try to do so, they may lose up to 25 percent of their principal.

With pay phone and ATM scams, investors are told they can get annual or monthly returns of up to 15 percent by investing in coin-operated telephones or ATMs. Regulators say these could be Ponzi scams, where money from new investors is used to pay off earlier investors until the scam can't be sustained anymore.

The No. 1 problem, though, is unlicensed individuals selling securities.

Increasingly, these individuals are independent life insurance agents who have seen sales of life insurance products fall in recent years and are lured by high commissions into selling fraudulent or exotic investments, Bortner said. Many times, agents don't realize that the products they are selling are fraudulent, she said.

The other top investment scams, regulators say, are:

Affinity group fraud, where scammers use ties to a church or other group to bilk members out of their savings.

Promissory notes that guarantee high returns and are issued by unfamiliar or even bogus companies.

Ponzi and pyramid scams. Illegal pyramid schemes involve an investor's paying money upfront for the right to sell, say, an investment or product, but basically they make money by recruiting others to do the same, until eventually the scheme collapses.

"Prime bank" scams, luring investors with promises of spectacular returns through access to the top banks' investment portfolios or through secret investments of the rich.

Internet scams in which con artists online lure investors into various schemes, such as scammers' talking up a thinly traded stock that they later dump once investors buy shares and push up the price.

Viatical settlements, sold through a middleman, which offer investors an interest in the life insurance benefits of terminally ill people. Not all viaticals are scams, but they are risky and in some cases fraudulent, regulators said.

Get-rich-quick investment seminars.

Securities regulators estimate that consumers nationwide are bilked out of billions of dollars each year. And once investors become victims, it's often difficult for authorities to recoup lost money.

"If we get 50 cents on the dollar, that's a good recovery," said J. Joseph Curran Jr., Maryland's attorney general.

So, the best way to avoid being a victim is to take some preventive steps in the first place.

Consumers must learn to hang up the phone on smooth-talking sales people pitching inappropriate products, experts said.

Don't give personal or financial information to strangers calling out of the blue, Ward advised. "Keep your business private," she said.

Con artists often target their calls to older Americans, who are frequently home during the day, experts said.

"The best investment you could make to protect your parents is to buy them an answering machine and to tell them to screen their calls during the day," said Marc Beauchamp, executive director of the securities administrators group.

Call state regulators to find out if the investment adviser and the securities are registered. If not, don't invest, experts said. In Maryland, call 410-576-6360 or 1-888- 743-0023.

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