Originally created 01/15/04

State regulators identify leading investment fraud schemes



WASHINGTON -- State securities regulators have identified 10 top investment frauds, with improper mutual fund practices, scams targeting seniors and variable annuities new to the annual list.

The schemes are increasingly complex and confusing, costing Americans billions of dollars a year, the North American Securities Administrators Association said Wednesday. The group represents securities regulators in the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico.

The schemes are ranked roughly in order of prevalence or concern.

-Ponzi schemes: Perennial favorites, whose perpetrators use the money from recent investors to pay returns to earlier investors, until the schemes collapse. Promoters of the schemes typically blame government intervention for the failure of new investors to get their promised returns.

-Investment fraud targeting seniors: Often living on fixed incomes and sometimes in desperate financial straits, older investors are being targeted with complex investment scams promising huge returns.

-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 falsely claim the money invested is guaranteed by insurance companies or collateral located offshore, and promise unusually high returns.

-Unscupulous brokers: Despite the stock market's rebound last year, regulators say they still receive many investor complaints about brokers cutting corners or engaging in fraud to enrich themselves.

-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.

-Insurance agents and other unlicensed individuals 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.

-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 very wealthy individuals know about prime bank notes.

-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.

-Mutual fund practices: The industry scandal has ensnared dozens of mutual fund companies and brokerage firms since last September, when New York Attorney General Eliot Spitzer began targeting preferential trading deals for big-money customers. Illegal practices include after-hours trading. By going through brokerage firms and other third parties, some big investors such as hedge funds have been able to cash in on after-hours news ahead of most shareholders, who at that hour would be forced to chance buying at the next day's closing price.

-Variable annuities: A popular way to save for retirement, a variable annuity is a contract between an investor and the company selling it in which the company agrees to make periodic payments to the investor, beginning immediately or at some future date. The payments to the annuity holder vary and are determined by the performance of the underlying investments. The instruments are tax-deferred.

As sales of annuities have increased dramatically over the past decade, so too have complaints from investors. Regulators say they're concerned that investors aren't being told about high surrender charges or are being misled with claims of guaranteed returns. Variable annuities are not suitable for many retirees who cannot afford to lock up their money for a long time, regulators say.

On the Net:

North American Securities Administrators Association: http://www.nasaa.org