Top 10 investment frauds identified

Associated Press

WASHINGTON — State securities regulators yesterday identified the top 10 investment frauds they are fighting, with risky investments in coin-operated telephones and automated teller machines making the list for the first time this year.

Also new to the annual list: high-yielding "callable" certificates of deposit, often sold to elderly people despite their 10- to 20-year maturities, the North American Securities Administrators Association said.

The group, known as NASAA, represents securities regulators in the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico.

With the jumpy stock market pushing many investors, especially seniors, to seek safe havens, scam operators are pitching their investments as low-risk and high-return — an impossible combination, NASAA says.

"The higher the return, the higher the risk," said Deborah Bortner, the group's president, who also is Washington state's director of securities.

Here is NASAA's list of the top 10 areas of investment fraud, ranked roughly in order of prevalence or concern, which cost Americans billions of dollars a year:

• Unlicensed individuals, such as life insurance agents, selling securities. To verify that someone is licensed to sell securities, regulators advise consumers to call their state securities regulator and not to invest if the person isn't licensed.

• Affinity group fraud: Investment scams targeting religious, ethnic and professional groups, perpetrated by members of the groups or people claiming to want to help them.

• Investments in pay telephones and automated teller machines. Last month, 25 states and the District of Columbia announced enforcement actions against companies and individuals, including life insurance agents, that took some $76 million from 4,500 investors in alleged pyramid schemes involving pay phones.

• Promissory notes: They typically involve loans to companies made by investors in exchange for a fixed amount of periodic income. However, legitimate corporate promissory notes are not usually sold to the general public and some schemes are fraudulent. The schemes often target elderly investors.

• Internet fraud: Scams using the Internet that include stock price manipulation, illegal pyramid schemes, insider trading and acting as a broker or investment adviser without being properly licensed.

  Regulators urge investors to ignore anonymous financial advice in chat rooms and other sites on the Internet.

• Ponzi and pyramid schemes: Perennial favorites, whose perpetrators use the money from recent investors to pay returns to earlier investors, until the schemes collapse.

• "Callable" certificates of deposit: Higher-yielding CDs that don't mature for 10 to 20 years unless the bank — not the investor — calls, or redeems, them. Redeeming them early may result in large losses.

  Regulators say sellers of the CDs often fail to adequately disclose the risks and restrictions and often target elderly investors.

• Viatical settlements: In the legal practice of viatical investing, investors buy the policies through a broker and a portion of the money is paid to the policyholder, who often has AIDS or cancer, to help with medical bills.

  The investor is supposed to get paid when the person dies, but in some cases, the policyholders aren't really dying. In other cases, the policyholders don't exist.

• Prime bank schemes: They promise investors risk-free, triple-digit returns on debt notes said to be guaranteed by the world's biggest banks. Promoters often claim that only big corporations, foreign banks and super-rich individuals know about prime bank notes.

• Investment seminars: They have proliferated in recent years, and regulators say the people getting rich are often the promoters, who make money from admission fees and sales of books and audiotapes.