Top Investor Traps of 2010

By Barbara Bennett, Investor Education Specialist, Secretary of State Securities Division        

The NC Secretary of State Securities Division wants to keep you from losing your hard earned “green” on phony eco-friendly investments and other scams. Con artists are creating new and innovative ways to convince potential victims that they will not only make big profits, but also help the environment or reduce our foreign oil dependence. These traps could leave you in a financial hole for many years. So take a look at this year’s list of traps and be leery of offers that sound too good to be true.

Green Schemes: Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers alike. Scammers cash in on unsuspecting investors by exploiting headlines like 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 or wave energy, carbon credits and other alternative energy financing.

Oil and Gas Schemes: Fraudulent energy promoters continue to capitalize on oil and gas as investment alternatives to the stock market, which tend to be highly risky and unsuitable for investors who cannot afford the risk. They can also carry high sales commissions.

Exchange-Traded Funds (ETFs): While these resemble mutual funds in many respects, some may contain hidden traps and complexities. ETFs are designed for short-term trading (such as day-trading), and not for buy-and-hold strategies.

Foreign Exchange Trading Schemes (FOREX): Promoters profit by charging high commissions or selling investment strategies. Some 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.

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 even exist.

Affinity Fraud: As I wrote in my first article last year, scam artists have found it lucrative to abuse their own membership or association with an identifiable group, such as the military, to convince a potential investor to trust the legitimacy of an investment. The use of group affiliation can convince investors to trust unquestioningly.

Undisclosed Conflicts of Interest: Not all advice is given with your best interest at heart. Some salespeople receive lucrative commissions or other incentives by selling products that are risky or inappropriate for an investor. Ask your financial professional to explain how they are compensated.

Private or Special Deals: Some investors encounter investment opportunities couched as “private” or for “special clients only.” 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. Although properly used by many legitimate issuers, they have become an attractive option for con artists who promote the special or private nature of these schemes and make false and misleading representations.

“Off the Books” Deals: Be cautious if your broker offers an investment on the side instead of one sold through his or her employer. These “off the books” investments may not only be illegal, but they can also be especially risky without the oversight and supervision of the broker’s employer.

Unsolicited Online Pitches: Promoters of fraudulent investment schemes are moving beyond e-mail and turning to social media and online communities, such as Facebook, Twitter, Craigslist and YouTube to solicit unsuspecting investors. Some may use these sites to spread misinformation or promise high-yield, tax-free returns from investments in offshore markets. Once the money is sent to another country, investors may be difficult or impossible to get it back. Investors should approach any unsolicited investment opportunity with suspicion.

The Securities Division recommends that investors do business with licensed brokers and advisers. Calling us at 1-800-688-4507 before investing can help protect your financial security. And, reporting any suspicion of investment fraud to the Securities Division might prevent others from becoming scam victims.