Every year the North American Securities Administrators Association lists its top 10 threats to investors. There are some new ones this year, so let's see what the scam artists have cooked up.
• The latest wrinkle: "Crowd-funding." You may have heard of crowd-funding in the form of not-so-famous professional musicians soliciting funds via the Internet for studio time to record their latest albums. In return, you receive a copy of the record when it's finished – essentially buying the record in advance. Not all crowd-funding proposals are so benevolent. The authorities are increasingly investigating Internet investment solicitations in general. And that's likely to increase again next year as new federal legislation – the JOBS Act, which makes it easier for start-up companies to solicit investments – permits people to actually use crowd-funding to solicit investors. Two words, says the securities association: "Be wary."
• The second new development is we're seeing more investment advisors like Bernie Madoff who are ripping off their clients. The states are taking more responsibility for regulating these advisors, and last year state actions against them almost doubled from the year before, says the securities association.
• Third, look out for scam artists wanting to sell you investments for your Individual Retirement Account. They know that, given the penalties for early withdrawal, investors will be reluctant to get rid of the dubious investments they've bought.
• Fourth, be wary of investors touting the EB-5 investment-for-visas program. This federal program grants a visa to a foreigner who invests $500,000 in a new company. A scam artist may tout a connection to a federal jobs program like this to bolster his credibility. Consider this recent case: a developer of an artificial sweetener factory made his Chinese investors a key selling point to a small Missouri town. The developer defaulted on the first bond payment, leaving the town and investors out millions of dollars.
• Then there are the old standbys. Fifth on the list are gold and other precious metals, which scam artists hype as super-safe when in fact these markets can be turbulent. And far too often, if investors buy metals through an e mail or phone offering, they discover the metals simply don't exist. If the investment is more complicated than a stock or a bond, be especially careful.
• Same for number six on the list, oil and gas. Con artists pump them as safe and lucrative plays compared to more conventional investments such as the stock market. What they don't say is that these investments are actually very risky; you should buy only if you can afford to lose everything you invested. A recent survey of the states found oil and gas fraud the fourth-most common product leading to investigations and enforcement actions; there are active investigations in two dozen states all over the country.
• Seven, promissory notes, also get touted as a secure way to avoid losses on more conventional investments. All too often, investigators find instead a Ponzi scheme, where money from new investors is used to pay returns to earlier investors. Consider Brian Wellens of Colorado Springs, indicted by a grand jury for conspiracy to commit securities fraud and racketeering for raising $8.5 million from 19 people that went right into his pocket and his other businesses. Had investors asked if the investment was registered and if Wellens was licensed, they might have dodged this one.
• Eight, despite all the news about the real estate market possibly bottoming out, beware of proposals to buy, renovate or flip distressed properties. Real-estate fraud is the third most common investment leading to state investigations and enforcement actions. Just one example: A Utah man solicited $4 million from investors to buy and refurbish real estate; he promised a minimum return of 18 percent a year at what he said was no risk. Last year the project went bust.
• Nine is the most common scam state regulators see: Private-placement investments, which don't have to be registered with the authorities. Usually it's hard to get your money out, hard to get good information and they don't get much oversight from the authorities.
• Finally, beware of salesmen who want you to sell your securities so you can buy one of their annuities. The elderly particularly seek a guaranteed return on their money without the market fluctuations of stocks and bonds. But annuities aren't always the best investment, nor is it always wise to sell your other investments to buy a new one..