Scams Prey on Shaky Investors

Investment scammers are taking advantage of low interest rates and depressed stock markets to prey on unsuspecting investors, state regulators warned Monday.

From unlicensed independent insurance agents to so-called prime bank schemes, most scams involve promises of little or no risk and high returns, North American Securities Administrators Assn. President Joseph Borg said.

“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,” he said.

Regulators said investors are looking for alternatives to the stock market--which last month fell to a five-year low amid corporate accounting scandals--and traditional money market accounts and certificates of deposit, which are providing a low rate of return because of the drop in interest rates.

Topping NASAA’s annual list of 10 scams in what it has called a $40-billion scam industry are schemes by independent insurance agents, who are promised high commissions in return for peddling the bogus investments.

Here are the scams, ranked by NASAA in order of prevalence or seriousness, with examples of recent enforcement actions:

* Insurance agents selling securities: Investors in at least 14 states lost almost $30 million in an alleged scam sold almost entirely by independent agents, according to regulators. Money raised from the sale of fictitious limited partnerships was used to make payments to another group of investors.

* Unscrupulous stockbrokers: The New York attorney general took action against seven brokers and two firms for bilking hundreds of elderly investors out of more than $12.5 million through a pay-telephone scam. The brokers pressured investors into liquidating their CDs, annuities and IRAs, promising “risk-free” 14% returns.

* Analyst research conflicts: In May, the New York attorney general concluded a probe into whether Merrill Lynch & Co. issued misleading research reports. Merrill agreed to pay a $100-million fine and make significant changes in the way it does business.

* Promissory notes: Short-term debt instruments often sold by independent insurance agents and issued by little-known or nonexistent companies promising high returns with little or no risk.

* Prime bank schemes: Scammers promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The scam artists often target conspiracy theorists, promising access to the “secret investments” made by the Rothschild banking family or Saudi royalty.

* Viatical settlements: These interests in the death benefits of terminally ill patients are “always risky and sometimes fraudulent,” NASAA said.

* Affinity fraud: Schemes in which the scam artists use their victims’ religious or ethnic identity to gain their trust and then steal their life savings.

* Charitable gift annuities: These are transfers of cash or property to a charitable organization. The value of the annuity is less than the value of the cash or property, with the difference constituting a charitable donation.

* Oil and gas schemes: Scams that rise in frequency with predictions of oil shortages or a rise in natural gas prices. Arkansas regulators recently forced two firms to stop their marketing efforts after finding that a natural gas well touted as a “can’t lose” proposition hadn’t produced in years.

* Equipment leasing: Con artists selling interest in pay phones, cash machines or Internet kiosks have scammed thousands of investors.