Secretary of State Warns of Top Ten Investor Traps in 2010
FOR IMMEDIATE RELEASE
Contact: Pam duPré
(Carson City, NV; August 2, 2010) –Secretary of State Ross Miller’s office today released its annual list of traps that cautious investors should avoid as the impact of the financial crisis and increased market volatility continue to reverberate along Main Street. Secretary Miller said investors rebuilding nest eggs damaged by the market collapse as well as those frustrated with low interest rates are not only targets for professional con artists, they are particularly susceptible to speculative investments that most often turn a promise for quick and large profits into thin air.
“Don’t be afraid to ask questions and don’t be rushed into any investment,” Miller said. “You’ve heard that saying, ‘Trust but verify’? Well, in the case of investing your hard earned money, the watch words should be ‘Never trust. Always verify.’”
The Secretary of State’s website provides links to sites which provide detailed background information about those who sell securities or give investment advice. Would be investors can check out their broker or adviser before investing and can call the Securities Division if they need help making those checks. “The more information you have, the better your chance of sidestepping a trap that can leave you in a financial hole for many years,” said Miller.
Top 10 Investor Traps
The following products and practices deserve special scrutiny:
• Exchange-Traded Funds (ETFs). While ETFs resemble mutual funds in many respects, some, such as leveraged and inverse ETFs, may contain hidden traps and complexities, and may consist of highly leveraged bundles of exotic financial instruments, including options and other derivatives. Given their potential for volatility, leveraged ETFs may not be suitable for most retail investors. These types of ETFs are primarily designed for short-term trading (such as day-trading), and not for buy-and-hold strategies. Also be aware that some ETFs are infrequently traded and you may not always be able to sell them when you want to.
• Foreign Exchange Trading Schemes. Currency trading and foreign exchange (forex) trading schemes can be particularly harmful to unsuspecting investors. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment strategies assuming that trades are actually made. In some instances, salesmen and promoters who claim to have complex algorithms or propriety software programs which allow them to beat the market are actually just running Ponzi schemes. Nevada’s Securities Division has encountered situations where there were no trades; the money was simply stolen.
• Gold and Precious Metals. High gold prices have trapped some investors in gold bullion scams in which a seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor when it gains in value. In many instances the gold does not exist. Nevada Investors have also been harmed by promoters pitching investment pools in precious metal commodities and gold mines. Because Nevada is a big mining state, it has long attracted those looking to run mining scams. Promises of new and secret methods of extracting gold or platinum from old mining sites or newly staked mining claims should be viewed with a skeptical eye. Before buying stock in a publicly traded company claiming to be involved in precious metal mining, review their filings with the SEC to see if they are making any money. If they are losing money but giving their chief executives big salaries and raises, it may be an investment you should avoid.
• Green Schemes. Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers alike. Scammers also exploit headlines to cash in on unsuspecting investors, whether from investments related to the clean-up of the Gulf of Mexico oil spill or the rising national interest in environmental innovations tied to “clean” energy, such as wind energy, wave energy, carbon credits and other alternative energy financing.
• Life Settlement Investments. Investors should be wary of life settlement investments and others based on life insurance and death benefits because they are complex and the regulation of them varies by state. Some transactions and products may not be regulated at all, and others are illegal in certain states. Although life settlement investments, also known as viatical settlement investments, can be marketed and sold legally, the products are so complex that investors may be exposed to fraud and other risks. Many of these products are pitched by salesmen who claim special expertise in assessing an insured’s longevity risk. Several different variations of these types of life insurance and death benefit schemes have been developed in the past years, and each deserves careful scrutiny. Nevada law now defines viatical settlement investments as securities which must be sold through licensed and regulated broker-dealers.
• Oil & Gas Schemes. Regardless of the price at the pump, fraudulent energy promoters continue to capitalize both on interest in the commodity and on oil and gas as investment alternatives to the stock market. Oil and gas investments tend to be highly risky and unsuitable for traditional, smaller investors who cannot afford the risk. Securities investments offering profit participation in oil and gas ventures can be legitimate, but even when the underlying project is genuine, any revenues realized can be absorbed by high sales commissions paid to the promoter and dubious “expenses” skimmed off by the managing partner. Some promoters, many of whom have had past run-ins with regulators, have attempted to structure their “joint ventures” or “general partnerships” to avoid securities regulation and deprive investors of important protections.
• Affinity Fraud. Scam artists have found it lucrative to abuse membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Typical affinity groups include religious, ethnic, professional, educational, language, age and any other group with shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation, investors should seek further information about the investment from an unbiased, independent source and review both the promises and risks. This is true even when you are referred to an investment by a friend. Con artists running Ponzi schemes use early investors who are paid from the investment money of subsequent investors, to promote the scheme through word of mouth to family and friends. Undisclosed Conflicts of Interest. When obtaining investment advice about securities, investors need to know that not all advice is given with their best interest at heart. Some salespeople can receive lucrative commissions when they sell a product that is risky or inappropriate for an investor, but don’t have to disclose that financial incentive. Investors should demand that anyone giving advice or recommendations disclose how they are compensated. While licensed Investment Advisers are held to a fiduciary standard of care when dealing with their customers, sales representative of securities brokers are not. Learn the difference, and find out whether the person from whom you are taking investment advice is required to put your interest ahead of his or hers.
• Private or Special Deals. Some investors encounter investment opportunities or deals couched as “private” or only for “special” clients. While securities laws do offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors in a non-public offering, these securities are not subject to the same review as others. Many state securities regulators have seen continued or increased abuse of fraudulent private offerings made under federal exemptions or not regulated at all. Although properly used by many legitimate issuers, private offerings have become an attractive option for con artists looking to steal money from investors by promoting the special or private nature of these schemes and by making false and misleading representations.
• “Off the Books” Deals. “Off the books” sales are an increasingly common threat to investors. Be cautious if your broker offers an investment on the side instead of one sold through his or her employer. These “off books” investments may not only be illegal, but they can also be especially risky without the oversight and supervision of the broker’s employer. All of your investments should be reflected on the firm’s monthly or quarterly statements to you. If you are receiving a separate statement on an investment you made through an employee of your broker firm, write to the firm to make sure the investment was approved by the firm to be sold to you. If the firm tells you it was not an approved investment, report that to the Nevada Securities Division.
Secretary Miller’s Securities Administrator, Carolyn Ellsworth, cautions investors to familiarize themselves with the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment. “Investors should do business with licensed brokers and advisers and should report any suspicion of investment fraud to their state securities regulator,” Ellsworth said. “That call could protect your financial security and might prevent others from becoming victims.”
The Secretary of State's office cannot provide specific investment advice or validate an investment's proposed return. For more information, contact the Nevada Secretary of State’s Office, Securities Division: In Las Vegas at 702-486-2440, and in Reno at 775- 687-9950.