Top 10 Investment Traps In Washington
The Washington State Department of Financial Institutions (DFI) has identified the following ten investment traps as the most likely to trap Washington investors.
Before making any investment, DFI recommends that you check to make sure that both the investment and the salesperson is registered and licensed in Washington by calling 360-902-8700 or 1-877-RING DFI (746-4334).
View Press Release Announcing Top 10 Traps
1) Ponzi Schemes
Despite the heightened awareness of Ponzi (or pyramid) schemes following Bernard Madoff’s multi-billion dollar fraud and 150-year prison sentence, these scams continue to trap investors. The Ponzi scheme is a house-of-cards swindle in which high returns are paid to initial investors using funds from later investors. The later investors often end up losing all or most of their money to the promoter.
Investors are urged to beware of investment opportunities promising high and steady rates of return. While some Ponzi investors may have a slight chance of realizing a return on their investment, most investors have from the outset no hope of recovery.
2) Real Estate Investment Schemes
State securities regulators have noted a marked rise in scams disguised as offers to help homeowners caught facing foreclosure “save” their homes or “fix” their mortgages -- usually in exchange for a fee paid in advance. Most of these advance-fee offers only generate a quick profit for the con-artist and provide little or no benefit to the consumer.
Some homeowners, particularly seniors, may be attracted to reverse mortgages, which are a legitimate lending option. However, the resulting lump sum home equity payment makes them an attractive target for unscrupulous salesmen, who may attempt to direct these funds toward worthless or unsuitable investment products.
3) Short-term Commercial Promissory Notes
Many seniors have lost their life savings by investing in short-term commercial promissory notes that are nine months or less in duration. The seller of these notes may touted them as being “insured” or “guaranteed,” but the insurance companies generally are located outside of the United States, are not licensed to do business in the United States, and lack the resources necessary to deliver on the promised guarantees.
Unlike publicly advertised promissory notes, promoters of these notes usually attempt to use commercial paper exemptions as a basis for selling the products without registration. The commercial paper exemptions apply only to high-grade commercial paper traded by major corporations – not to these risky notes pushed to the public by a sales force paid with extremely high commissions.
4) Private Placement Offerings
Private placements offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors as opposed to a public offering made through national securities markets, often under a federal registration exemption (Regulation D, Rule 506). Companies using this exemption can raise an unlimited amount of money without registering the offering with the SEC. Although properly used by many legitimate issuers, the exemption has become an attractive option for con artists, as well as individuals barred from the securities industry and others aiming to steal millions of dollars from investors through false and misleading representations.
5) Natural Resource Investments
DFI’s Securities Division expects to see a continuing rise in energy and precious metals scams promising quick, high returns. Investors anxious to recover losses quickly likely will be hooked by fraudulent oil and gas “investments” as well as fraudulent offerings of investments tied to natural gas, wind and solar energy, and the development of new energy-efficient technologies.
6) Gold Bullion and Currency Scams
With the high price of gold, investors should beware of gold bullion scams in which the seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor as it gains in value. In many instances the gold does not exist.
Similar are the many forms of foreign exchange (forex) trading schemes. 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 many instances there are no trades; the money is simply stolen.
7) Speculative Inventions and New Products
New products are for venture capitalists who know how to assess the risks. They are not good investments for your retirement money even though they may promise high returns.
8) Life Settlements
State securities regulators long have been concerned about life settlements – commonly known as “viaticals” -- and the rising popularity of these products among investors has prompted a recent congressional investigation. While life settlement transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits may come at a high price for investors, particularly senior citizens.
Wide-ranging fraudulent practices in the life settlement market include Ponzi schemes; fraudulent life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk.
9) Entertainment Investments
These unregistered investments, encompassing a variety of products including movies, infomercials, internet gambling and pornography sites, promise high returns while offering little disclosure of risk.
10) Leveraged Exchange-Traded Funds (ETFs)
This relatively new product has been offered to individual investors who may not be aware of the risks these funds carry. The funds, which trade throughout the day like a stock, use exotic financial instruments -- including options and other derivatives -- and promise the potential to provide greater than market returns as the value of the underlying assets rise or fall. Given their volatility, these funds typically are not suitable for most retail investors.
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