"Top 10" Investment Scams Listed by State Securities Regulators

(this is from the North American Securities Administrators Association (NASAA) web page at www.nasaa.org (click here)

Washington D. C. (August 26, 2002) " State securities regulators today released a list of the "Top 10" scams, risky investments or sales practice abuses they're fighting. New to the third annual list are unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.

"Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street," said Joseph Borg, president of the North American Securities Administrators Association (NASAA) and director of the Alabama Securities Commission. "Con artists know investors are concerned about the volatile stock market and low yields on bonds and bank deposits, so they pitch their scams as safe alternatives and promise high returns ; an impossible combination."

The 2002 list was again topped by independent insurance agents selling risky or fraudulent securities. Borg said that while most independent insurance agents are honest professionals, too many are letting high commissions lure them into selling high risk or fraudulent investments.

The federal war on terror and large budget deficits at the state level are diverting or pinching resources to fight investment fraud, Borg warned.

"Putting people in jail gives investors the biggest bang for their regulatory buck," said Borg. "So legislators at all levels need to ensure that regulators and prosecutors have sufficient resources to successfully bring securities fraud cases."

Here are the"Top 10"investment scams, ranked roughly in order of prevalence or seriousness:

1. Unlicensed individuals, such as independent insurance agents, selling securities. In hundreds of cases from Washington state to Florida, scam artists are using high commissions to entice independent insurance agents into selling investments they may know little about. The person running the scam instructs the independent sales force; usually insurance agents but sometimes investment advisers and accountants; to promise high returns with little or no risk. For example: In an alleged scam sold almost entirely by independent insurance agents, investors in at least 14 states lost close to $30 million. According to Ohio securities regulators, money raised from the sale of fictitious limited partnerships was used to make interest payments to another group of promissory note investors. Both groups were promised double-digit returns. In April a court issued a preliminary injunction and appointed a receiver in connection with the allegations.

   An Arizona insurance agent was sentenced to 10 years in prison for selling $1.8 million in worthless stock and bogus promissory notes to investors. Another Arizona insurance agent was sentenced in May to five years in prison for scamming 32 elderly investors out of nearly $2 million by first soliciting them to purchase "living trusts"l and then switching them into annuities and finally into bogus promissory notes. A third Arizona insurance agent, working with his two sons, scammed $16.2 million by selling high risk brokered CDs, viatical contracts, real estate deals and equipment leases. They were ordered to repay all $16.2 million and fined another $133,000.

   To verify that a person is licensed or registered to sell securities, call your state securities regulator. If the person is not registered, don?t invest.

2. Unscrupulous stockbrokers. The declining stock market has caused some brokers to cut corners or resort to outright fraud, say state securities regulators. At the same time, some investors have grown more cautious and are scrutinizing their brokerage statements for unexplained fees, unauthorized trades or other irregularities. In North Dakota, regulators investigated a complaint from an investor who received conflicting account statements. They discovered that two brokers working for H.D. Vest Investment Securities Inc. issued phony account statements to cover up losses from hundreds of unauthorized trades. The brokers had also made unsuitable recommendations such as risky options contracts. Under a settlement with state securities regulators, H.D. Vest agreed to repay clients' out-of-pocket losses plus 6 percent, totaling over $3.2 million.

   In New York, the attorney general's office took action against seven brokers and two firms for bilking hundreds of elderly investors out of more than $12.5 million through a pay telephone scam. The brokers pressured investors into liquidating their CDs, annuities and IRAs, sometimes at significant penalty, and promised them "risk-free" 14 percent returns. So far one firm has agreed to pay $5.9 million in restitution.

3. Analyst research conflicts. In May, the New York Attorney General's office concluded a 10-month investigation into whether Merrill Lynch had issued misleading research reports by entering into a settlement agreement with the firm. Under the agreement, Merrill Lynch agreed to pay a $100 million fine and make significant changes to way it does business. NASAA is assisting a multi-state task force investigating conflict of interest issues at Wall Street firms. The primary focus of the ongoing investigation is to determine whether analysts issued glowing research reports and made "buy" recommendations in order to win investment-banking business. State investigators are now reviewing materials provided by a dozen firms for possible securities law violations.

   In June NASAA learned of an attempt by Morgan Stanley Dean Witter to amend an early version of the Sarbanes-Oxley Act with language that would have ended the states? probe into whether Wall Street analysts intentionally misled investors. NASAA held a press conference and met with lawmakers; the draft amendment was ultimately not included in the bill.

4. Promissory notes. These are short-term debt instruments often 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.

   In June, four Georgia-based scam artists were each sentenced to 17 years in prison for recruiting independent insurance agents to sell millions of dollars worth of bogus promissory notes. While investors were promised nine-month returns as high as 21 percent, half of each investment went straight to commissions that were divided among company principals and sales agents. Acting on a tip from the Better Business Bureau, Georgia securities regulators seized nearly $5 million of the $8 million stolen from local investors and, together with federal investigators, used the evidence uncovered to broaden their investigation and prepare criminal charges. In the end, the Federal Bureau of Investigation, working with Georgia regulators, found the ringleader; Virgil Womack; had scammed over $150 million from investors nationwide. Of the $150 million, nearly $90 million was seized and returned to investors. The average age of the victims was 68.

   In another case, a Maine court sentenced an insurance agent to seven years in prison for running a promissory note scam that took 25 investors for more than $1 million. The agent, who was sentenced in June, told investors the notes were "better than certificates of deposit and life insurance policies," regulators said, and that they would yield 10 percent to 12 percent returns annually.

   "A 12 percent return may not seem over-the-top by bull market standards, but it's far more than banks are offering now for insured deposits," said Chris Bruenn, administrator for the Maine Office of Securities and NASAA's president-elect.

5. "Prime bank" schemes. Scammers promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. Purveyors of these schemes often target conspiracy theorists, promising access to the "secret" investments used by the Rothschilds or Saudi royalty.

   In Texas, a Harlingen-based con artist promised returns of 6 percent to 8 percent a month through a secretive web of money dealers supposedly set up by a coalition of governments in 1914 to pay for World War I debt. In videotape shown at Monday's press conference, the promoter claimed that seven "world traders" control the entire global money supply. In the end, the scam took over 300 investors for roughly $6 million.

6. Viatical settlements. Originated as a way to help the gravely ill pay their bills, these interests in the death benefits of terminally ill patients are always risky and sometimes fraudulent. The insured gets a percentage of the death benefit in cash and investors get a share of the death benefit when the insured dies. Because of uncertainties predicting when someone will die, these investments are extremely speculative. In a new twist, Pennsylvania regulators say "senior settlements" "interests in the death benefits of healthy older people" are now being offered to investors.

   In June, 15 individuals were indicted in connection with a scam that cost hundreds of investors nationwide at least $100 million. State securities and insurance regulators, together with federal regulators, allege the individuals, employed by Liberte Capital Group, were involved in a scheme to buy life insurance policies from terminally ill individuals who lied to insurance companies about their medical conditions. Liberte managers used investor funds to support lavish lifestyles, including investments and the purchase of large homes and dozens of boats and cars. A receiver has been appointed in the case.

7. Affinity fraud. Many scammers use their victim's religious or ethnic identity to gain their trust; knowing that it's human nature to trust people who are like you ; and then steal their life savings. From "gifting" programs at some churches to foreign exchange scams targeted at Asian Americans, no group seems to be without con artists who seek to take advantage of the trust of others.

   In Alabama, nine individuals have been charged with scamming parishioners at the Daystar Assembly of God church in Prattville out of more than $3 million. Investors were told their money would be used to purchase retirement properties in Florida. The income generated by the Florida properties would be used to payoff the mortgage of the Prattville church and build a religious theme park, investors were told. In reality, state securities regulators allege, the money went to pay off investors in a previous scam and to purchase equipment for unrelated businesses.

8. Charitable gift annuities. These annuities are transfers of cash or property to a charitable organization. The value of the annuity is less than the value of the cash or property, with the difference constituting a charitable donation. While most annuities offered by charitable organizations are legitimate investments, investors should be cautious of little-known organizations or those that provide only sketchy information.

   In Arizona, regulators uncovered a scam that took 430 investors nationwide for an average of $133,000. The scam involved the purchase of charitable gift annuities from the Mid-America Foundation. According to regulators, Robert Dillie, founder of Mid-America, ran what amounted to a $54 million Ponzi scheme through a network of independent insurance agents, financial planners and accountants. Dillie used investors' funds to purchase three homes in Las Vegas, a ranch in South Dakota, pay child support, book charter flights and support his extensive gambling.

   Magdalena Scheller, 68, of Phoenix, invested more than $400,000 in Mid-America. A life insurance agent approached her after her husband died. "It makes you wonder if there are any honest people out there," Scheller said at Monday?s press conference.

   "Unfortunately, Mid-America is not an isolated scam," Mark Sendrow, director of securities for the Arizona Corporation Commission told reporters Monday. "We are looking at two more foundations in the Phoenix area which have issued millions of dollars of charitable gift annuities in the last few years, and both were basically penniless before they began issuing them."

9. Oil and gas schemes. These scams follow the headlines, rising in frequency with predictions of oil shortages or a rise in natural gas prices. In Arkansas, securities regulators forced Energy Consultants and Ark-La-Tex Consulting Co., L.L.C. to discontinue their marketing efforts after finding a natural gas well touted to investors as a "can't lose" opportunity hadn't produced in years.

10. Equipment leasing. While the majority of equipment leasing deals are legitimate, thousands of investors have been scammed by individuals selling interests in pay phones, ATMs or Internet kiosks. In a typical equipment leasing scam, a company sells a piece of equipment through a middleman. As part of the sale, the company agrees to lease back and service the equipment for a fee. Investors are promised high returns with little or no risk. But state regulators say high commissions paid to salesmen and promised returns that are unrealistically high doom many projects. In North Carolina, regulators took action against an individual who sold an Internet kiosk to an investor for $24,950, promising a 17 percent return. The individual had previously sold pay phone leases to investors from a company that later filed for bankruptcy.

Before investing, state securities regulators urge investors to call their offices and ask if the individual selling the investment is licensed to do so. Regulators say investors can also save themselves a lot of grief by asking a second question; whether the investment itself is registered. To check out an investment or salesperson, contact your state securities regulator. Their phone number is in the white pages of your phone book under "government"l or available online at www.nasaa.org. (click here)

Lynn R. Siewert AIMC
Pension Consultant |   Branch Manager
CA Insurance License #00B00579
2005 E. Evergreen Blvd
Vancouver, WA 98661
Ph: 360-750-9626


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