By John Waggoner, USA TODAY
Investment scams always sprout during a recession, and con artists are reaping a big harvest in this economic downturn.
"It's pretty bad out there," says Texas Securities Commissioner Denise Voigt Crawford.
Investors desperate to make up losses from their 401(k) plans or stock portfolios are the primary victims, she says.
What are the biggest pitfalls? The North American Securities Administrators Association released its annual Top 10 Investor Traps on Wednesday. Among them:
•Green schemes. Alternative energy frauds play on the allure of energy-efficient technologies. Some scammers pushed oil-spill cleanup technology in the wake of the Gulf oil spill.
•Affinity fraud. Con artists love a crowd, and particularly a crowd of like-minded people: church members, ethnic groups, professional groups. Check any adviser's credentials before you do business with him.
•"Off-the-books" deals. If your investment adviser or broker offers you a special "side deal" — available only to the best customers — walk away. Odds are the deal is especially risky, illegal or non-existent.
•Unsolicited online pitches. Scam artists have found a new home in social media. You're not going to get a hot penny-stock tip from an anonymous e-mail. You won't get one on Facebook, Twitter or Craigslist, either.
•Exchange traded mutual funds. Although many ETFs are simple, low-cost investments, some use derivatives to amplify gains and losses — something many novice investors may not know, Voigt says.
The NASAA took special aim at investment advisers who have undisclosed conflicts of interest. The SEC is studying whether to hold all brokers to a fiduciary standard, meaning they have to act in the client's best interest.
The NASAA has long been in support of the fiduciary standard.
"It's not that you can't sell something to a client when you have a conflict of interest," Crawford says. "You just have to disclose it."
A growing scam that's not on NASAA's list: viatical schemes, where you invest in securities backed by the life insurance of a dying person. The dying person gets an immediate cash payout, while the backer of the plan pays the insurance premiums and collects the death benefit.
Life settlements are legitimate investments when properly structured, Crawford says, but they're typically not liquid. And you have to be sure that the sponsors are indeed paying premiums.
Texas-based National Life Settlements sold about $30 million of life settlements to investors and was shut down in December. Investors got back $19.8 million, or about 69% of what they invested.
Always check out an adviser before you invest.
One good source is the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.
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