Vermont Commissioner Lists “Top 10” Investment Fraud Schemes

January 21, 2004

Vermont’s Department of Banking, Insurance, Securities and Health Care Administration (BISHCA) Commissioner John Crowley issued a bulletin aimed at helping investors cope with the “increasingly complex and confusing arena of investment frauds.”

Crowley released the North American Securities Administrators Association’s (NASAA ) latest results from its investment fraud survey, conducted annually to determine the most significant scams and frauds being perpetrated upon the public.

“Investors are faced with a myriad of factors that contribute to an atmosphere ripe for financial fraud” Crowley stated. “Low interest rates, past stock market returns, and scandals in the financial services industry have forced many investors to look for alternative investment opportunities.”

The following ranking of the NASAA’s Top 10 Scams, Schemes and Scandals for 2004 is based on the order of prevalence and seriousness as identified by state securities regulators [note especially N°6]:
Ponzi Schemes: A scam in which early investors are paid with the money from later investors. In the fall of 2003 BISHCA staff worked in conjunction with the Securities and Exchange Commission to shut down an Internet based Ponzi scheme that had an office in St. Albans and over 25,000 investors worldwide.
Senior Investment Fraud: The current economic environment of low interest rates, a volatile stock market and financial scandals have given rise to various complex schemes targeted at seniors feeling the effects of the marketplace.
Promissory Notes: A scam of long standing on this list these short-term debt instruments are often sold by little known or non-existing companies and promise high returns with low risk.
Unscrupulous Broker/Dealer Representatives: State securities regulators nationwide continue to receive complaints about brokers who continue to cut corners or even perpetrate fraud when dealing with their clients.
Affinity Fraud: Preying on the belief that it is human nature to trust people who are like you, con artists often use perceived similarities to gain an investor’s trust. These scams are often found in church and ethnic groups and can be devastating both financially and emotionally.
Insurance Agent Fraud: While most insurance agents are honest professionals, all too often they are lured by high commissions into selling products that are outright fraudulent or that they are not qualified to sell. It is important to “check up” on all individuals recommending the purchase or sale of securities.
Prime Bank/High-Yield Investment Schemes: This long time favorite of the financial swindler involves investments in banks that are available only to the rich. In fact these banks do not exist and neither do the exorbitant interest rates/returns. A recent scam in Oklahoma resulted in the conviction of 5 men for defrauding 5,000 investors of $14.6 million.
Internet Fraud: The Internet has allowed con artists to use old time schemes, such as the Ponzi, in news ways that allow easy access to thousands and thousands of investors. The Federal Trade Commission reports that Internet fraud resulted in losses of $122 million in 2002.
Mutual Fund Business Practices: Since late in 2003 state and federal securities regulators have launched investigations into various mutual fund practices. These practices have included actions by both the fund family or manager and the sales representative offering the funds to investors.
Variable Annuities: As the sales of variable annuities rise year after year so to do the number of complaints received by regulators. The complex nature of these insurance/investment products often makes it easy for brokers to make them appear to be suitable. It is very important for investors to fully understand these products, especially the features that may not be as beneficial as they appear.

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