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Your Firewall Against Investment Scams

Last update on: Oct 17 2017
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Scam artists are developing more cunning cons, and you are among their prime targets. Fortunately, new help is available to protect your wealth.

Older Americans always have been the targets of scam artists. Seasoned Americans tend to have more money than younger citizens do and also seem to be more trusting. Now, those in retirement or near-retirement are more vulnerable than usual and are being targeted more aggressively. Low interest rates, stock market losses, rising health care costs, and other factors make many seniors more likely to seek extra returns. They are considering the purchase of unfamiliar financial instruments to try to enhance their financial positions.

In past visits I’ve explained why identity theft is the fastest-growing crime and how to protect yourself from it. Don’t let the focus on ID theft relax your guard against other scams. Many investment scams can be packaged to resemble legitimate investments. Here are the most likely cons to cross your path.

Charitable gift annuities can be great ways to get a current tax deduction, make a charitable gift, and secure a lifetime stream of income at the same time. You give money to a charity and in return get a promised stream of payments. The annuity payments will be less than you could get from a commercial annuity. The difference is treated as a charitable contribution and is deductible by you. Most established charities pay the same annuity rate, determined by an association of charities.

Unfortunately, some fraudsters are taking advantage of this opportunity. They use several angles to steal money. Sometimes the charities issuing the annuities don’t exist. The promoters walk off with the money. Often, the purported charity has a name very similar to a well-known charity’s. Sometimes, the charity exists and is legitimate. But the promoters take a commission of 30% or more of your deposit. That greatly reduces your tax deduction, your annuity, and the benefit to the charity. Of course, these scam artists tempt seniors by promising payments that exceed those offered by others.

Protect yourself from phony charitable gift annuities by verifying that the charity exists, is registered with your state, and checking its financial statements. Also, read the contract closely to verify who is responsible for making the payments.

I frequently get e-mails and other communications soliciting investments in promissory notes. You probably do, too.

The promoters say that your investment will be loans to small, growing businesses. The argument is that these businesses have locked in opportunities for expansion but cannot convince bankers or Wall Street to fund them. So, the opportunity is available to you. The promise is that you’ll receive a high return on a loan that will be repaid after a short time. That loan will be secured by business property, so it is secure even if the business fails.

Promissory notes are sophisticated investments. Even professionals who thorough investigate their business loans know that a percentage of them will be unpaid. They solicit capital only from the wealthy and institutions who can afford to lose some of the money. The investors pool their money in a fund instead of making loans directly to individual businesses. That gives them diversification and reduces their risk.

In the scams, often the businesses don’t even exist. In other scams, the businesses are start ups with a low probability of success. The promoters take high commissions to ensure they get paid.

You should be suspicious of any investment that promises returns significantly above what you can receive from other investments. Don’t invest if it is not through a pooled fund. Ask for details of past performance of the fund. Examine the staff that chooses the loans and the resources they have. Be sure you know what the fees will be.

The classic scams, of course, are prime bank schemes (discussed in the April 2003 issue), Viatical Settlements, (discussed in the February 2003 issue) and Ponzi or pyramid schemes. The easiest ways to spot these scams are they promise very high returns and it is not clear to an outsider how those returns are earned.

These and other scams are sold as what the lawyers call “unregistered securities.” The legal definition of a security is very broad, and most investments must be registered as securities with the state securities commission and perhaps the federal Securities and Exchange Commission. A detailed prospectus also must be received by the investor before the sale. It is easy to call your state securities commission or check online at www.nasaa.org to see if an offering is registered. Don’t invest if you do not receive a complete prospectus, the promoter has not registered the security, or you are not given complete details before a sale.

Another tip off to fraud is that the investment is being sold by an insurance agent or someone else who is not registered as a securities broker. Don’t be shy about asking if the seller is a registered broker. Also, ask how the seller will be paid and how much.

A number of organizations provide help to investors seeking to avoid scams. You can call or check the web sites of the Better Business Bureau (good descriptions of most scams), the Securities and Exchange Commission, and your state securities commission. The newest help is from the North America Securities Administrators Association, a group of state and provincial securities regulators from the U.S., Canada, and Mexico.

Its web site (www.nasaa.org) now contains a Senior Investor Resource Center with investor education and tips about identifying and avoiding scams. It also contains an “investigate checklist” of questions to ask before making an investment and links to the other sites mentioned.

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