NASAA Releases 2011 Top Investor Traps and Threats

The North American Securities Administrators Association Inc. recently released its top ten list of financial products and practices that con artists use to defraud investors out of their hard-earned money. This year's list of top investment frauds and investment scams is as follows:

Affinity Fraud. Affinity fraud has become increasingly prevalent in recent years. According to the NASAA, a recent national study found that 25 percent of Ponzi schemes use affinity fraud tactics. "The most commonly exploited are the elderly or retired, religious groups, and ethnic groups," warned the NASAA. "Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter."

Bogus or Exaggerated Credentials. Recently, the U.S. has seen an unprecedented climb in the number of credentials available to professionals as well as an increase in the number of salespeople boasting meaningless or exaggerated professional designations. "Investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials," warned the NASAA.

Distressed Real Estate Schemes. The real estate crisis has led to the proliferation of investment offerings involving distressed real estate. "While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors," said the NASAA. "Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully."Credentials and fancy titles conjure up trust and authority in the eyes of investors, a fact that both legitimate financial professionals and con artists use to their advantage.

Energy Investments. Energy investments are volatile and risky investments, even when they're legitimate, and a total loss of principal is more common than most investors want to believe. Add to that the fact that many fraudsters use high-pressure sales tactics to convince investors of the investments' "bountiful" yields and "unparalleled" returns, and you have an investment that's simply too risky for most investors. "Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich," the NASAA stated in the announcement.

Gold and Precious Metals. Con artists often claim that investments in gold and precious metals are sure-fire ways to earn solid, risk-free returns. This simply isn't true. According to the NASAA, this past spring saw a 30 percent decline in silver's value over a mere three-week period. And, many gold schemes involve "sales" of gold that don't even exist.

Mirror Trading. A new trend in social media, mirror trading, can be used by fraudsters to launch fraudulent investment schemes, to manipulate the markets, and to misrepresent their professional credentials. "Investors [who partake in mirror trading] should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms," warned the NASAA.

Private Placements. Much has been written on the unsuitable nature of private placement investments for the majority of investors. They're highly illiquid, risky products, and they are only marginally regulated, if at all. While there are legitimate opportunities involving private placements, these products are commonly used to mask an investment fraud.

Promissory Notes. Promissory notes are inherently risky products, and they are quickly becoming a fraudster favorite. To learn more about how promissory note fraud schemes work, read our investor article here.

Securities and Investment Advice Offered by Unlicensed Agents. Securities regulators have seen a consistent increase in investment advice being handed out by unlicensed sales agents, particularly in the insurance field. "Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods," warned the NASAA. Investors should insist on seeing a proper license before following anyone's investment advice.

Securitized Life Settlement Contracts. While there are legitimate life settlement contracts and investments, the majority of "securitized" life settlement contracts (i.e. investments that combine life settlement contracts with traditional securities) are nothing but frauds. Often they leave "victims with nothing but worthless paper issued by a bonding company that does not maintain sufficient assets to fulfill the guarantee, operates in an unregulated overseas territory or simply does not exist," said the NASAA.

To find out how to protect yourself from investment fraud, browse our investor library here.


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