Sept. 18, 2009
SAINT JOHN (CNB) - With the one-year anniversary of the September 2008 market collapse, there are now signs of recovery. The New Brunswick Securities Commission (NBSC) is reminding investors to take steps to inform themselves with the knowledge to avoid this year's top investor traps.
Investors under pressure from the struggling economy should resist the lure of sales pitches promising to rebuild their savings. Investors should be alert at all times, but especially when money is tight. Falling into an investment trap makes it even harder to get back on solid financial ground.
Many of the traps on the list promise high returns to cash-strapped investors, but provide little if any information about the associated risks, and offer high commissions to aggressive sales forces. These traps were, in part, identified by the Enforcement Trends Project Group of the North American Securities Administrators Association, of which the NBSC is a member.
"When it comes to investing, verify everything and everyone before you part with your money," said Rick Hancox, executive director of the NBSC. "Education and information are an investor's best defence against investment fraud. Investors should always be wary of unsolicited financial advice or no-risk investment opportunities."
Provincial securities regulators such as the NBSC can provide registration information and status for those who sell securities or give investment advice. The NBSC also maintains a caution list of individuals and firms that may be targeting New Brunswick residents, while not being registered to trade in the province. If you are unsure of an investment opportunity, contact the NBSC.
While the investor traps below are listed alphabetically, the NBSC has identified currency scams, natural resources investments and Ponzi schemes as the greatest potential threats to investors in the coming year.
With the high price of gold and other commodities, investors should beware of scams that retain "purchased" gold (or other valuable currencies) in a "secure vault" and promise to sell it as it increases in value. In many instances the gold does not exist. Similarly, there are many forms of foreign exchange (forex) schemes. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment strategies that assume trades are actually made. In many instances there are no trades - the money is simply stolen.
Exempt securities scams
Exempt securities, on their own, are not scams. They are sold by companies that are allowed to sell the securities without filing a prospectus. A scam usually starts with an unsolicited pitch to invest in a promising business that is about to go public. Potential investors may be told that the investment is only available to very wealthy people, but an exception may be made just by signing some paperwork. This paperwork usually involves the investor lying about his or her income. Exempt securities are risky, and investors should be aware that they could lose all of their investment.
The Internet is a quick and easy way for scam artists to find potential victims for their investment scams. Fraudsters can operate anonymously from anywhere in the world, making them hard to catch. Once money is in the hands of an online scam artist, it's likely gone for good. Watch out for unsolicited e-mail that usually promotes a certain product or service, including investments.
Banks, credit card companies and other legitimate businesses will never ask a customer to provide personal information through regular e-mail. Your best bet is to not reply to an e-mail that asks for confidential information, including passwords, not to click on any links provided, and not to give out any personal information.
Natural resource investments
The NBSC expects to continue to see a rise in energy and precious metals scams promising quick, high returns. Investors anxious to quickly recover losses can be hooked by oil and gas schemes, as well as fraudulent offerings of investments tied to natural gas, wind and solar energy, and the development of new, energy-efficient technologies. Be sure to fully investigate any investment, and ask questions before investing any money.
Despite the heightened awareness of Ponzi schemes following Bernard Madoff's multibillion-dollar fraud and 150-year prison sentence, these scams continue to trap investors. A Ponzi scheme pays high returns to initial investors out of the funds of later investors, who end up losing all or most of their money to the promoter. The return that a Ponzi scheme pays requires an ever-increasing flow of money from investors to keep the scheme going. The system is doomed to collapse because there are no underlying earnings from the money received by the promoter, and the pool of willing investors cannot grow forever.
Pyramid schemes are frauds that promise very high returns based on the number of new recruits into the scheme. The returns that are paid out come from the funds paid in by new investors. These scams are touted as multi-level marketing operations. However, multi-level marketing is not illegal. Legitimate multi-level marketing occurs when income is earned from the sale of products, not from people enrolling in the program. It becomes a pyramid scheme when income is primarily from the participants buying into the program, or selling products at a price much higher than their actual value.
Real estate investment schemes
North American securities regulators have noted a rise in scams disguised as offers to help homeowners, caught up in the turbulent housing market, save their homes or fix their mortgages, usually in exchange for a fee paid in advance. Some homeowners, particularly seniors, may be attracted to reverse mortgages, which are a legitimate lending option. However, the resulting lump sum home equity payment makes them an attractive target for unscrupulous salespeople, who may attempt to direct these funds toward worthless or unsuitable investment products.
Short-term investments with a high rate of return
Many seniors have lost their life's savings by falling victim to these purported short-term investments that offer a high rate of return that is "guaranteed." These risky investments are pushed by an aggressive sales force that is paid with extremely high commissions. Many of these scams end up being a Ponzi scheme. Remember: never invest in anything you don't fully understand.
Speculative inventions and new products
Investing in new products or inventions is best-suited to venture capitalists who know how to assess the risks. Given their high risk and volatile nature, they are not suitable investments for your retirement money, even though they may promise high returns.
"Scam artists follow the headlines, and most traps are variations on ones that have been around for years," said Hancox. "To stop investment fraud we need to know where and when it's happening. If you suspect that you have been approached with a scam, we encourage you to report this information to us."
For more information about the red flags of fraud, visit the NBSC website.
The New Brunswick Securities Commission is the Crown corporation that regulates the securities industry in New Brunswick. It is funded indirectly by investors through industry. Its mandate is to protect investors from unfair, improper or fraudulent practices, and to foster fair and efficient capital markets, as well as confidence in those markets.
MEDIA CONTACT: Michelle Robichaud, communications, New Brunswick Securities Commission, 506-643-7045, or 1-866-933-2222, e-mail, Michelle.Robichaud@nbsc-cvmnb.ca.