Securities Regulators' `Most Wanted List': The Top 10 Investment Scams of 2002

Consumers' Research Magazine, October 2002 | Go to article overview

Securities Regulators' `Most Wanted List': The Top 10 Investment Scams of 2002


State securities regulators recently released a list of the "Top 10" scams, risky investments, or sales practice abuses they're fighting. New to the third annual list are unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.

"Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street," said Joseph Borg, former president of the North American Securities Administrators Association (NASAA) and director of the Alabama Securities Commission. "Con artists know investors are concerned about the volatile stock market and low yields on bonds and bank deposits, so they pitch their scams as safe alternatives and promise high returns--an impossible combination."

The 2002 list was again topped by independent insurance agents selling risky or fraudulent securities. Borg said that while most independent insurance agents are honest professionals, too many are letting high commissions lure them into selling high-risk or fraudulent investments.

The federal war on terror and large budget deficits at the state level are diverting or pinching resources to fight investment fraud, Borg warned.

"Putting people in jail gives investors the biggest bang for their regulatory buck," said Borg. "So legislators at all levels need to ensure that regulators and prosecutors have sufficient resources to successfully bring securities fraud cases."

Here are the top 10 investment scams, ranked roughly in order of prevalence or seriousness:

1. Unlicensed individuals, such a independent insurance agents, selling securities: In hundreds of cases from Washington state to Florida, scam artists are using high commissions to entice independent insurance agents into selling investments they may know little about. The person running the scam instructs the independent sales force--usually insurance agents but sometimes investment advisors and accountants--to promise high returns with little or no risk. For example:

In an alleged scam sold almost entirely by independent insurance agents, investors in at least 14 states lost close to $30 million. According to Ohio securities regulators, money raised from the sale of fictitious limited partnerships was used to make interest payments to another group of promissory note investors. Both groups were promised double-digit returns. In April a court issued a preliminary injunction and appointed a receiver in connection with the allegations.

Earlier this month, an Arizona insurance agent was sentenced to 10 years in prison for selling $1.8 million in worthless stock and bogus promissory notes to investors. Another Arizona insurance agent was sentenced in May to five years in prison for scamming 32 elderly investors out of nearly $2 million by first soliciting them to purchase "living trusts" and then switching them into annuities and finally into bogus promissory notes. A third Arizona insurance agent, working with his two sons, scammed $16.2 million by selling high-risk brokered CDs, viatical contracts, real estate deals, and equipment leases. They were ordered to repay all $16.2 million and fined another $133,000.

To verify that a person is licensed or registered to sell securities, call your state securities regulator. If the person is not registered, don't invest.

2. Unscrupulous stockbrokers: The declining stock market has caused some brokers to cut corners or resort to outright fraud, say state securities regulators. At the same time, some investors have grown more cautious and are scrutinizing their brokerage statements for unexplained fees, unauthorized trades, or other irregularities. In North Dakota, regulators investigated a complaint from an investor who received conflicting account statements. They discovered that two brokers working for H.D. Vest Investment Securities Inc. issued phony account statements to cover up losses from hundreds of unauthorized trades. …

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