Investment Scams Are Alive and Well
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During the 6+ years of the new millennium, we have experienced the end of one of the longest bull markets in history, a devastating bear market, a brief rally, and more recently a "sideways" period where the markets seem to be just drifting along. While we usually think of investment scams appearing when the markets are way up (preying on greed) or way down (preying on fear), it is when the markets are in the doldrums that investment scams can sometimes be the most prevalent.

Think of it this way - since the bear market of 2000 - 2002, millions of "Baby Boomer" investors are trying to recover money lost in the bear market for their upcoming retirement. Many were pleased to see the rally in 2003 and to a lesser extent in 2004, but have since been rocking along, generally going sideways in their investments. It is during times like these that some investors become likely prey for investment promoters who will promise them supposedly no-risk ways to "make all their money back."

Generally speaking, American consumers are a savvy bunch. We tend to make sound, well-informed buying decisions when it comes to our capital purchases such as a new car or a home. We know what we want and we know what to look for to avoid being taken. But when it comes to investments, we are not always so careful. The business of investment fraud, swindles and scams is alive and thriving, especially with the advent of the Internet. Securities regulators estimate that securities fraud costs Americans billions of dollars each year.

In this week's E-Letter, I'm going to warn you about some of the new investment scams being promoted to investors, as well as discuss some of the "old faithfuls" that have been around for a long time. After that, I'll arm you with information to help you spot and avoid investment scams in the future.

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Tactics Used By Scam Artists

No matter what their particular scam, swindlers typically use four basic tactics specifically designed to pique your interest and gain your trust. The first tactic is an expectation of large profits. Securities swindlers have traditionally played upon greed. Some scam artists boast of huge profits to be made. Yet more often, the scammers talk about profits that are just large enough to make you interested, but not skeptical. ("You can easily earn 15-25%!")

The second tactic used is claiming that there is low or no risk attached to the investment. The desire to get something for nothing, or almost nothing, is strong. Some swindlers are so bold as to claim that there is NO risk to their "investment" or that returns are guaranteed. ("Our investment offers equity returns with CD risk!")

The third tactic used by investment scammers is a sense of urgency. You should never feel pressured to invest, but swindlers will almost always say that it is essential that you invest right away, or that the offering is very limited or may be closing soon. They may try to make you feel as though you have been selected for a rare and special, but limited time, opportunity. ("Invest today; delaying could reduce your profit or even cause you to lose this opportunity!")

The fourth tactic often used is confidence. Scam artists are going to be very confident of what they are selling you and of all the money you are going to make. They will also try to gain your confidence and your trust. Most swindlers like to talk a lot, so you don't have time to think of, and ask, difficult questions. I'll tell you what questions to ask a little later on. ("Trust me, you're going to make a LOT of money!")

You may now be thinking that you've had some of these same sales tactics used on you by legitimate salespersons. It's true that some sales professionals employ some of the same tactics that scam artists do. That's why the scam artists use them - they have been shown to be effective in most any sales situation.

However, while a legitimate salesperson may show a great deal of confidence or try to set a sense of urgency, they will generally not promise more than the product is able to deliver. After all, if you are dissatisfied with a product, you're likely to complain and the salesperson may lose his or her commission. In an investment scam, however, by the time you figure out something has gone wrong, the money - and the salesperson - are usually long gone.

Today’s Top Investment Scams

Investment scams have been around as long as there have been investors and have taken many forms over the years. Some have become classics like ponzi/pyramid schemes, promissory notes and prime bank schemes. In today's volatile markets, investors have expressed renewed interest in non-traditional investments and investments that are "safe." This has provided the investment scam artists with a rich and fertile environment.

The North American Securities Administrators Association (NASAA), is an organization made up of securities administrators from all 50 states, Canada and Mexico. Periodically, NASAA produces its "Top 10 List of Investment Scams" to document fraudulent investment promotions investors are the most likely to see. As you read over NASAA's list below, you will see that some of the items listed are legitimate investments - but the way they are sold can cause them to be an investor trap. NASAA's most recent "Top 10" list includes the following:

1. Ponzi/pyramid schemes. Always in style, these swindles promise high returns to investors, but the only people who consistently make money are the promoters who set them in motion. They operate by using money from one group of investors to pay off others, with the promoters skimming off the rest. New investors are often taken in by testimonials from individuals who invested early in the scheme and reaped large returns.

Inevitably, the schemes collapse when money from new investors can no longer keep pace with distributions to withdrawing investors. Ponzi schemes are the legacy of Italian immigrant Charles Ponzi. In the early 1900s, he took investors for $10 million by promising 40% returns from arbitrage profits on International Postal Reply Coupons.

2. Senior Investment Fraud. As our population continues to age, investment fraud targeting senior citizens will continue to increase. As seniors see their medical and living expenses increase, they become vulnerable to schemes that promise to provide a higher level of income than is available from other legitimate income investments.

Some of the frauds targeting seniors are very complex, and have included unregistered securities, promissory notes (see below), charitable gift annuities, viatical settlements, and Ponzi schemes as mentioned above. Many of these scams are promoted to seniors as "CD alternatives" to make it sound as if there is little or no risk.

3. Promissory notes. When interest rates are low, investors are lured by these short-term debt instruments that promise high returns - upwards of 10% - 15% monthly - with little or no risk. NASAA states that this scam is usually always in the Top 10 list and that these bogus notes are often sold by insurance agents, who may have been taken in themselves by false promises of high returns and lucrative commissions.

Unfortunately, the notes are usually issued by little-known, or sometimes non-existent, companies that have no intention of ever returning the principal, much less paying any interest. One of the worst examples of fraudulent notes involved a Grammy-nominated polka star named Jan Lewan. Lewan admitted defrauding investors in 21 states by using phony promissory notes issued by his failing business ventures.

4. Unscrupulous Brokers. While most stock brokers are honest, hard-working individuals, some use deceptive and outright fraudulent business practices to increase their incomes. The tactics used by these rogue brokers include making unauthorized trades to generate commissions, placing conservative investors in unsuitable investments that pay a higher commission, or even finding ways to siphon funds from their clients' accounts for their own personal use.

NASAA notes that in many cases, irregularities were uncovered when clients went through their brokerage statements in detail. Therefore, it is important that you always review all of your brokerage statements carefully, and call your brokerage firm if you have any questions about trades or fees charged to your account.

5. Affinity Fraud: Year after year, affinity fraud continues to rank near the top of investment scams. Affinity fraud occurs when a con artist uses their victims' religious, political, social or ethnic identity to gain their trust. Knowing that it is human nature to trust people who are like you, these crooks will often fake an affiliation with a group, and may even join an organization, to be better able to steal the life savings of its members.

It has even been documented that some scammers have knelt in prayer with their victims to gain their trust before ripping them off. From "gifting" programs at some churches to foreign exchange scams targeted at Asian Americans, no group seems to be without con artists who seek to exploit others for financial gain. It's always a good idea to have a third party review an investment offer, even if it's made by a trusted member of your church or other association.

6. Unlicensed individuals selling securities. In order to sell securities legally, one must be licensed and registered. Do not believe that strangers who call you on the phone are registered just because they say they are. To verify that a person is licensed or registered to sell securities, call your state securities regulator or the National Association of Securities Dealers (NASD). You can find the contact information for your state securities agency and the NASD in the contact information following the Conclusions section below. If the person offering you an investment opportunity is not registered, it's probably best to not invest.

Also, don't assume that someone is registered to sell securities just because they are an attorney, accountant, or are licensed to sell insurance. Many of the "cease and desist" orders issued by securities regulators are targeted at insurance professionals who sell securities without the proper license. NASAA admits that most independent insurance agents, accountants and attorneys are honest professionals, but some are lured by high commissions into selling fraudulent or high-risk investments. In some of these cases, the insurance agent doesn't even realize the investment is fraudulent until it's too late and their clients' money is gone.

7. Prime bank schemes. These scams often prey upon the belief that wealthy individuals can somehow access high-yield, tax-free returns that are not available to the average investor. Con artists promise investors access to these investments that offer returns far above market rates, supposedly from securities trading through offshore banks. Purveyors of these schemes often target conspiracy theorists, promising access to the "secret" investments used by the Rothschilds, Saudi royalty, etc. In the end, however, once an investor's money has gone offshore, it never returns.

8. Internet fraud. Scammers use the wide reach and supposed anonymity of the Internet to defraud investors. Many of the schemes are simply updated versions of well-known scams that have been robbing investors of their money for years. One such scheme is called the "pump-and-dump," where unethical brokerage firms pump up the price of a low-priced stock by promoting it heavily in e-mails. Once the price has risen, the brokerage then "dumps" its shares at a large profit and stops promoting the stock. Without the bogus support, prices of the shares plummet, leaving unwary investors holding worthless shares in some cases.

Many states now have Internet surveillance programs that watch for fraud and investigate investor complaints. Regulators urge investors to avoid being "dot-conned" by ignoring anonymous financial advice in e-mails, on the Internet and in chat rooms.

9. Mutual Fund Business Practices. It seems odd that mutual funds would be listed among investment scams even though they are among the most popular investments going right now. While most mutual fund companies do a great job administering their offerings, recent scandals have prompted NASAA to notify investors to be alert when investing in these securities.

In general, the recent mutual fund scandals have involved fund company insiders who allowed certain large investors to have special privileges not available to most other investors. For example, some fund companies allowed large hedge funds to enter trades long after the trading deadline had passed and the fund's performance for the day was known. Regulators likened this to being able to bet on a horse after the race was run. Other companies restricted frequent trading for most investors, but bent the rules for large institutional investors.

This "late trading" and "frequent trading" can result in a reduced return for the average fund investor. Unfortunately, it is very difficult, if not impossible for investors to know if their mutual fund companies engage in this improper behavior. However, now that the abuses are well known, both state and federal regulatory agencies are subjecting mutual fund companies to far more scrutiny than in the past, which should result in fewer instances of illegal and unethical practices.

10. Variable Annuities. This is another example of a perfectly legal financial product that is sometimes subject to abusive sales tactics. Unlike fixed annuities that provide only a relatively low rate of interest, variable annuities are insurance contracts that allow an investor to participate in the gains (or losses) of the stock and bond markets.

Aside from the potential to participate in market gains and losses, variable annuities have other benefits that include favorable income tax treatment and a death benefit. However, these benefits come at a cost. Many variable annuity contracts pay large commissions to the selling agent. As a result, the insurance company must build in a substantial surrender charge should the investor decide to terminate the contract prior to a set period of time, usually five to seven years. In addition, the insurance company also charges fees for the death benefit as well as investment management fees, both of which reduce the investment return.

The scam comes in when variable annuities are sold to investors without all of these expenses and surrender charges being sufficiently explained. It's not until investors want to move to another program that they learn of surrender charges that will actually eat into their principal. The end result is that their money is locked into an insurance contract they no longer want unless they pay a large fee to get out.

As you can see, investment scams can be found everywhere, and can even involve the sale of legitimate investment and insurance products. Scammers use direct mail, the telephone, phony newsletters, seminars and, of course, the Internet. All too often, these fraudulent investments are sold to seniors who can least afford the loss of their nest eggs.

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Other Investment Traps To Avoid

Aside from the Top 10 investment scams, NASAA has published information warning investors of other types of traps. While space doesn't permit me to go into all of the additional schemes NASAA has outlined, I did want to briefly discuss a few of them so you will be aware of their existence:

Saleand Leaseback Contracts. In this scam, promoters try to skirt securities laws by having investors purchase physical assets such as pay phones or ATM machines, and then lease them back to an operator. Since investors can't service these machines, they are usually required to enter into a service agreement, costing even more money. Unfortunately, in many cases the equipment purchased does not exist and the investment turns out to be no more than a variation of the Ponzi scheme.

Equity Indexed CDs. In traditional Certificates of Deposit, the FDIC guarantees both principal and interest up to stated limits. In an Equity Indexed CD, however, only the principal is guaranteed, since the interest depends upon the performance of a given stock index. As a result, investors could tie up their money for years with little or no return to show for it. Note that this is another investment vehicle that is not a scam, but you need to be sure you understand all of the risks going in.

Oil and Gas Investment Fraud. With the price of oil and gasoline going through the roof, scams involving oil and gas drilling programs are on the rise. Any oil and gas venture is very risky, in that there's no guarantee that a well will be successful. However, those promoted by con artists are even more risky, since they will likely take the money and run. While it's tempting to want to participate in the oil boom, you should only do so with reputable companies whose background and history you know or can easily check out.

Recovery Rooms. In one of the saddest schemes of all, "recovery rooms" are operations that contact investors who have already been scammed and promise to recover the money that was lost. Of course, this service is only available for a fee, which must be paid in advance. The recovery room scam seems to be an apt example of "throwing good money after bad."

Self-Directed Retirement Plans. Many retirement plans, especially IRAs, are limited in allowable investments by either a trustee or custodian. However, there are independent IRA custodians who will allow a much wider variety of investments, but this additional flexibility can be a blessing or a curse.

While there's nothing inherently illegal about a self-directed retirement plan, some con artists have recognized that many investors have a large part of their investments tied up in their IRAs. Thus, to be able to con them out of their money, the scammers must first have their victims move their IRA to a custodian or trustee that will allow non-traditional investments. Once there, they bilk the investor out of their IRA money using one or more of the schemes discussed above.

You should always be wary of an investment that is promoted as "IRA approved," since no such investment exists. Some custodians allow more flexibility in the types of investments they will hold, but these custodians do not "approve" of any particular investment. They simply agree to follow your directions and hold them in your account. Thus, it's important that you check out any investment for your IRA just as much as you would for your non-IRA investments.

Questions YOU Should Ask

You may be wondering how you can avoid being taken by an investment huckster. The simple answer is, ask questions! With any investment, whether promoted in person, by mail, telephone or on the Internet, a wise investor should ALWAYS slow down, ask questions and get written information. Also, be sure to take notes so that you have a record of what you were told in the event of any future dispute. As the old saying goes, a short pencil is better than a long memory!

Many investment scammers hate questions and will be evasive and as vague as possible. This is a huge red flag. Others will be pushy and use high-pressure sales tactics, the goal being to separate you from your money as quickly as possible. A legitimate financial professional, however, will welcome your questions and ask several qualifying questions of his own. He will also have no hesitation about providing any written or background material you request.

The key is, if ANYTHING about the person makes you the least bit uncomfortable, or if the investment sounds too good to be true, JUST SAY NO!

10 Questions To Ask

Here is a list of 10 questions from the Securities & Exchange Commission that every potential investor should ask.

  1. Is the investment registered with the SEC and the state securities agency in the state where I live or is it subject to an exemption?
  2. Is the person recommending this investment registered with my state securities agency? Is there a record of any complaints about this person?
  3. How does this investment match my investment objectives?
  4. Where is the company incorporated? Will you send me the latest reports that have been filed on this company?
  5. What are the costs to buy, hold, and sell this investment? How easily can I sell?
  6. Who is managing the investment? What experience do they have?
  7. What is the risk that I could lose the money I invest?
  8. What return can I expect on my money? When?
  9. How long has the company been in business? Are they making money, and if so, how? What is their product or service? What other companies are in this business?
  10. How can I get more information about this investment, such as audited financial statements?

Conclusions - If It Sounds Too Good,,,

This E-Letter does not begin to address all of the types of investment scams that are out there. New ones are created every day. Many investors who get burned are too embarrassed to tell anyone or report the scammers to the regulators. Even if they do, many scammers move from place to place before the regulators can catch up with them.

Make sure that anyone who is attempting to sell you securities, or most other investments, is properly registered to do so. If they are registered, you can contact the appropriate agency (see below) and/or your state securities department and inquire as to whether they have a history of regulatory problems.

As noted above, the key is, if ANYTHING about the person or the investment makes you the least bit uncomfortable, or if the investment sounds too good to be true, JUST SAY NO!

My personal rule is, I don't buy any investment (or anything else for that matter) on the phone or via the Internet. Because I subscribe to so many publications, my name is on hundreds of mailing and telemarketing lists. I used to get tons of phone calls at my home. A few years ago, I subscribed to a service from Southwestern Bell called "Privacy Manager." Now, if I get a call at home from an "anonymous" number, the caller is required to identify who it is, and then we can decide if we wish to take the call. You might check with your phone company to see if they have such a service.


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For The Record

I operate a number of different companies that facilitate my financial services business, each of which is registered with various regulatory agencies to do business in all 50 states. Halbert Wealth Management, Inc. (formerly ProFutures Capital Management, Inc.), my investment management company, is registered with the Securities & Exchange Commission (SEC) as an Investment Advisor. ProFutures, Inc. is registered as a commodity pool operator with the U.S. Commodity Futures Trading Commission (CFTC), and the National Futures Association (NFA). ProFutures Financial Group, Inc. is a registered broker/dealer organization and is a member of the National Association of Securities Dealers (NASD).

And one last thing, none of my companies has ever sold, rented or otherwise shared any of our clients' information with anyone. Some investment firms sell or rent their clients' names and other information to outside parties. We do not! Never have, never will.

I hope this information on investment scams has been helpful. If you are looking for professional advice on your investments and financial planning, we will be happy to help you in a straightforward, no-pressure way that fits your goals and financial situation. Feel free to call us at 800-348-3601.

Best regards,

Gary D. Halbert

Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601.

Contact Information & Important Links

These are the names, address and phone numbers of the major regulatory agencies. Keep them handy.

Commodity Futures Trading Commission, 2033 K St., N.W., Washington, D.C. 20581, 202.254.6387. (
Federal Bureau of Investigation, Justice Department, 9th St. & Pennsylvania Ave., N.W., Washington, D.C. 20535, 202.234.3691. (
Federal Trade Commission, 6th St. & Pennsylvania Ave., N.W., Washington, D.C.20580, 202.326.3650. (
National Association of Securities Dealers 1735 K St., N.W., Washington, D.C.20006, 202.728.8044. (
National Futures Association, 200 W. Madison, Suite 1600, Chicago, IL60606-3447, Toll Free: 800.621.3570, In IL: 800.572.9400. (
Securities and Exchange Commission, 450 Fifth St., N.W., Washington, D.C.20006, 202.728.8233. (

Here are some important links to help you stay on top of investment fraud.

List of AllState Regulators:

SEC Enforcement Page

NASAA form for talking to your broker:

NASAA's investor awareness quiz:


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Copyright © 2006 ProFutures Capital Management, Inc. All Rights Reserved.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 09-05-2006 5:18 AM by Gary D. Halbert


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