Securities Regulators

Securities Regulators Announce "Unlucky 13" Investor Traps
by James J. Eccleston, Esq.

Securities Regulators Announce "Unlucky 13" Investor Traps

very year state securities regulators announce the top investment scams victimizing investors. For 2006, the North American Securities Administrators Association (NASAA) has released its "Unlucky 13" investor traps. There are some familiar, past offenders. But there are some new ones too. Let's overview the traps for 2006.
First, affinity fraud. This is a frequent offender because investors tend to more easily trust individuals associated with their religious, political or ethnic groups. Con artists know this and, according to NASAA, attempt to have investors "substitute an emotional appeal for careful analysis and critical thought."
Second, churning. This is a frequent abuse and, importantly, not one limited to con artists. Investment advisers, financial planners and brokers employed by the finest Wall Street wirehouses may be guilty of this offense. Churning occurs when the adviser places too many trades, largely to generate commissions. Something called "reverse churning" can occur when an investor who pays asset-based fees, in lieu of commissions, to an adviser to manage an account sees little or no activity in his or her account because the adviser is ignoring it.
Third, equity indexed certificates of deposit. Do not confuse these products with FDIC-insured CDs. Interest - or rate of return - varies according to the market and may be zero. Further, these products are highly suspect for seniors who need money for retirement given that they have liquidity problems.
Fourth, oil and gas investment fraud. With the rise in oil and gas prices, these scams continue to attract investors. These deals are very risky, and the promises of great profits are suspect.
Fifth, personal information scams. Do not divulge personal information unless you know who will have access to it. Con artists pose as "senior specialists" and obtain information by claiming they will prepare a living will or living trust, or to help obtain prescription drug coverage.
Sixth, prime bank schemes. This is a frequent scam. Purportedly, an off-shore bank offers a program with high-yield, tax-free returns, normally only available to the wealthy. NASAA describes this as "equivalent to a purse snatch."
Seventh, pump and dump schemes. Another favorite. This involves manipulating the price of a low-priced stock, pumping it upward as investors buy it. Then, when the stock price is high, the insiders bail out, leaving the investors holding the bag, as the stock price plummets to zero.
Eighth, recovery rooms. This scam is new to the list. According to NASAA, "Scam artists buy and sell the names and financial information of victims who have lost money to 'recovery room' operators who promise, in return for a fee that the victim must pay in advance, to recover the money lost in a worthless investment." This will be the second time that the investor is duped!
Ninth, registered high-interest promissory notes publicly advertised. High interest rates carry higher risk. The companies issuing the promissory notes may not be in business much longer, such that investors can lose their entire investment.
Tenth, sale and leaseback contracts. These investments attempt to avoid the investor protections of the securities laws by being structured to resemble the sale of a piece of equipment. NASAA cites payphones, ATM machines and Internet booths as examples. Investors are told that in time the buyer will sell the equipment back to the seller and the investors will recover their principal plus a rate of return. However, frequently the equipment does not exist and the seller lacks the financial capability to keep the promise of the repurchase.
Eleventh, self-directed pension plans. Watch for con artists who advise you to convert an employer-sponsored pension into a self-directed pension plan. This may be a scam.
Twelfth, unsuitable investment recommendations. This is a core claim in securities arbitration. Advisers must make suitable investment recommendations to investors, based upon their age, financial ability, tolerance for risk, investment objectives, liquidity needs, tax situation and any other factors that may be relevant. If not, investors may recover their investment losses in securities arbitration.
Thirteenth, variable annuities. These products are "sold not bought" because of their very high commissions. NASAA identifies this as a scam because there may be "inappropriate sales". Indeed, NASAA states that variable annuities "are only suitable for a very small percentage of the investing public and generally are not appropriate for most seniors." There are steep exit ("surrender") penalties and don't buy them inside a 401(k) or IRA.
Scams abound! Be careful out there.
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.