Fla. Advises on ‘Top 10’ Investment Scams to Beware of for 2004

Florida’s Chief Financial Officer Tom Gallagher and Don Saxon, Director of the Office of Financial Regulation, warned that investors will be challenged with increasingly complex and confusing investment frauds in 2004. New to this year’s list of Top 10 schemes that investors are reportedly likely to see are mutual fund practices, senior investment fraud, and variable annuities scams.

“Our fight against fraud never stops because each year con artists discover new ways to cheat consumers out of their hard-earned savings,” Gallagher said. “Education and awareness are an investor’s best defense against fraud.”

Investors lose billions of dollars annually to investment fraud, Gallagher said. “All securities regulators, whether local, state or federal, share the common goal of protecting investors,” he said. “I urge state lawmakers to help us combat fraud by ensuring that regulators have sufficient resources to protect our citizens.”

Don Saxon, securities regulator for Florida and a member of the North American Securities Administrators Association, pointed to a new interactive Fraud Center on the NASAA Web site (www.nasaa.org ). The center features details of the Top 10 scams, schemes and scandals; tips on how to detect con artists and avoid becoming a victim; an investor “Bill of Rights;” instructions on how to file an investment-related complaint; and contact information for each state securities regulator.

“Variable annuities make sense only for consumers willing to invest for 10 years or longer. They are not suitable for many retirees who cannot afford to lock up their money for a long time,” Gallagher said.

“Don’t let embarrassment or fear keep you from reporting investment fraud or abuse,” Gallagher said. “Con artists know that you might be hesitant to report that you have been victimized in financial schemes out of embarrassment or fear.”

Contact the Department of Financial Services’ toll-free Consumer Helpline (800) 342-2762 or visit the Department’s Web site at www.fldfs.com with any questions about investments.

Below is a ranking of scams, schemes and scandals for 2004 based on a survey of state securities regulators conducted by NASAA.

Top 10 Scams, Schemes and Scandals

1. PONZI SCHEMES. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from new investors to pay previous investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. In South Florida an individual was sentenced to 60 months in federal prison followed by three years probation and ordered to pay $27 million in restitution for his part in a Ponzi scheme. The individual pled guilty to conspiracy to commit securities fraud for defrauding some 3,000 Florida investors of $36 million dollars. The con artist promised investors a 30 percent return and falsely represented that their funds were guaranteed and insured.

2. SENIOR FRAUD. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy have created a perfect storm for investment fraud against senior investors. State securities regulators said older investors are being increasingly targeted with scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns.

In South Florida, two seniors invested in what were presented as high-yield mutual funds and “blue chip” stock, both bogus investments. One senior, who took out a $250,000 mortgage to invest, lost her home and is now living with her daughter. The other senior, who lost $150,000 in the scam, has had to heavily mortgage his home, which he at one time owned free and clear. Both seniors are struggling to make ends meet.

3. PROMISSORY NOTES. A long-time member of the Top 10 list, these short-term debt instruments often are sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.

In Southwest Florida, an investigation into $7.5 million securities fraud involving the sale of promissory notes led to the arrest of four individuals. They were charged with a total of 101 counts of securities fraud and sale of unregistered securities. Investigators believe as many as 175 Florida investors may have been defrauded.

4. UNSCRUPULOUS BROKERS. Despite the stock market’s rebound in 2003, state securities regulators say they are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. “I give credit to the increasing numbers of investors who are giving their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities,” Saxon said.

5. AFFINITY FRAUD. Con artists know that it is only human nature to trust people who are like themselves. That’s why scammers often use their victim’s religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud.

6. INSURANCE AGENTS AND OTHER UNLICENSED SECURITIES SELLERS. While most independent insurance agents are honest professionals, too many are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. “Scam artists continue to entice independent insurance agents into selling investments they may know little about,” Gallagher said. “Verify before you buy.”

7. PRIME BANK SCHEMES. Another favorite of con artists is to promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as “risk-free guaranteed high yield instruments” or something equally deceptive.

8. INTERNET FRAUD. With the Internet becoming a common part of daily life for increasing numbers of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyber-fraudsters took in $122 million in 2002, according to the Federal Trade Commission.

“The Internet has turned from an information superhighway to a road of ruin for victims of cyber-fraud,” Gallagher said.

Gallagher also warned investors to ignore e-mail offers from individuals representing themselves as Nigerian or West African government or business officials in need of help to deposit large sums of money in overseas bank accounts. “Don’t be dot.conned. If you get an e-mail pitching a deal that can’t be beat, hit delete,” he cautioned.

9. MUTUAL FUND BUSINESS PRACTICES. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators.

“These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders,” Saxon said. “We will continue to actively pursue inquiries into mutual fund improprieties and are committed to aggressively addressing mutual fund complaints raised by investors in our jurisdiction,” he added.

10. VARIABLE ANNUITIES. Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators are concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. The benefits of variable annuities – tax-deferral, death benefits among others – come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees.