To learn about the latest financial scams and swindles, check the headlines. The con artists look at what’s hot and on people’s minds and adjust their traditional pitches to match the latest news. Their scripts often are “ripped from the headlines.” You also can bet that the cons try to tap either the fear or greed of investors. Today’s economic uncertainty and market volatility are key tools of the swindlers.
The annual list of the top 10 investor scams and traps recently was released by the North American Securities Administrators Association. Study the list and ensure you and friends and loved ones aren’t tempted by a well-crafted con job.
The list is divided into two categories. There are the five big product scams, and the five big scamming practices. Most Frauds combine elements of the two lists. A product scam, for example, is likely to use one or more of the top scamming practices.
The top five products shouldn’t be a surprise: distressed real estate, energy, gold and precious metals, promissory notes, and securitized life settlement contracts. The first three products are in the headlines. The last two are used to promise steady or guaranteed income.
The top five practices are affinity fraud, bogus credentials, mirror trading, private placements, and investment advice from unlicensed providers.
Affinity fraud is by far the biggest tool of frauds, used in one of four frauds over the last decade, according to NASAA. Crooks associate themselves with an identifiable community or group. For example, many cons focus on members of the same church or an ethnic group living in the same geographic area. A closely-knit social circle is another affinity group used with great success by Bernie Madoff. The affinity gives people an instant comfort level and often dissuades them from performing proper due diligence. They assume everyone else in the group checked out the seller already.
Mirror trading is when you are promised to be able to duplicate the trades of a famous or successful investor at the same time they’re making the trades.
In most scams, the fraud guarantees a minimum or specific rate of return. The only thing backing the guarantee, of course, is the purveyor’s word.
In most cases a con is easily avoided by taking the time to check it out or even think about it. Often you can call your state securities regulator to find out if the offer is legitimate. Almost all financial products are required to be registered with the state or federal regulators as securities offerings before they can be sold, and almost none of the fraudulent deals are registered.
Often, a scamster will discourage an investor from taking time to evaluate things. The targets are often told this is a “hot” investment with a limited window for investment. If you wait, the opportunity won’t be available. A legitimate investment offering encourages you to look it over closely and ask a friend or advisor about it. When someone’s rushing you, you should consider that to be the same as their holding up a sign saying it’s a fraud.
Only about half of the financial frauds committed against older Americans were perpetrated by strangers, according to a MetLife study. The stranger-frauds look for what they consider “flags of vulnerability” in people. These can include age, uncertainty or confusion, living alone, having certain disabilities, or being in financial difficulty or distress.
Another 35% of frauds are by individuals known to the target, including friends and family. But those who are supposed to be helping the targets, such as handymen and caretakers, also can be cons.
The remaining frauds are committed by professionals and fiduciaries who are supposed to be helping the targets, such as bankers, attorneys, accountants, and the like. While these make up a small percentage of the criminals, their frauds tend to be for larger amounts than the others.
The first step in preventing a scam is knowing how they work and who commits them. Be aware of the top product scams. Then, be alert for the practices con artists use. It can be profitable to invest in distressed real estate, gold, energy, and other investments. But take some time to be sure it’s a legitimate investment. Also, don’t let pride get in the way. Ask for help and advice from someone who’s knowledgeable and trustworthy before committing money.
RW October 2011.