2005 Top Ten Investment Scams

On March 24, 2005, members of the North American Securities Administrators Association’s (NASAA) identified the ten most common investment scams for 2005. NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada, and Mexico.

In Washington State, securities enforcement officials identified the following top ten threats to Washington investors. The list is in order of prevalence and seriousness. For more information, visit NASAA's Fraud Center or review DFI's investment-related publications.

Ponzi Schemes

Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion.

Unlicensed Individuals Selling Securities

Anyone selling securities without a valid securities license should be a red alert for investors. Remember: No license? Find out why. No good reason? Do not buy.

Unregistered Investment Products

Con artists may attempt to bypass stringent state registration requirements by pitching non-traditional investments such as viatical or life settlements, pay telephone and ATM leasing contracts, and other investment contracts with the promise of “limited or no risk” and high returns.

Promissory Notes

Empty promises can leave these notes worth less than the paper on which they are printed. High rates of promised interest mean high risk. The lack of reliable financial information from the seller of notes is a red flag. Promissory notes are often sold by independent insurance agents and issued by little known or non-existent companies promising high returns. These notes can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.

Senior Investment Fraud

Because of their access to a lifetime of savings, seniors continue to face investment fraud by con artists peddling unsecured promissory notes, viatical settlements and other investments that are either fraudulent or unsuitable for them based on their particular financial needs. To learn more, visit NASAA’s Senior Investor Resource Center.

High-Yield/Prime Bank Note Investment Schemes

Con artists lure investors with promises of triple-digit returns through access to “risk-free guaranteed high-yield instruments,” prime bank/offshore trading schemes or something equally deceptive. For more information, see DFI's brochure about investment scams, frauds and con artists.

Internet Fraud

Stock promoters are using online “boiler rooms,” instant messaging, and fake websites to lure investors into “pump-and-dump” stock schemes.

Affinity Fraud

Con artists are increasingly targeting religious, ethnic, cultural, and professional groups. Investing solely on the basis of affiliation can be dangerous to one’s financial health.

Variable Annuity Sales Practices

Senior investors should beware of the high surrender fees and steep sales commissions agents often earn when they move investors in and out of variable annuities.

Oil and Gas Scams

With oil topping $50 a barrel and continued Middle East instability, regulators warn that con artists may renew schemes promising quick profits in oil and gas ventures.

Three other scams also were cited for “dishonorable mention,” including penny stocks, private placements, and investment seminars that made unsubstantiated claims that attendees are assured great wealth by following plans or attending other seminars sponsored by the promoters.