Financial Fraud

Current and Emerging Investor Threats for 2018

From REITs, to Ponzis and affinity-fraud a clear directive emerges: Investigate before investing

HARRISBURG, Pa., Jan. 2, 2018 /PRNewswire-USNewswire/ — Secretary of Banking and Securities Robin L. Wiessmann has issued a list of current and emerging threats facing investors in 2018, along with a reminder that in the age of technological innovation, it is more important than ever for consumers to take the time to investigate before they invest their money.

The top threats were determined by a survey of state securities regulators conducted by the North American Securities Administrators Association (NASAA), which identified promissory notes as the leading source of complaints or investigations.

Used generally by companies to raise capital, legitimate promissory notes are marketed and sold almost exclusively to sophisticated or corporate investors with the resources to research the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal. Average investors should be cautious about offers of promissory notes with a duration of nine months or less.

The survey also revealed other frequently identified investor complaints:

Real estate investments, including non-traded real estate investment trusts (REIT)
A REIT is a company that owns – and typically operates – income-producing real estate or real estate-related assets. These legitimate investments carry significant risk, including lack of liquidity and high fees. The department reminds advisers and investors that even if the tax implications change, suitability criteria do not change. These products are not appropriate for every investor.

Ponzi Schemes
Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.

Oil and gas-related investments or interests
Most oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.

Variable annuity sales practices
Deferred variable annuities are hybrid investments containing securities and insurance features. Due to the product’s complexity and confusion surrounding their features, regulators are concerned about questionable sales practices used to market variable annuities to consumers. Learn more.

in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves

Affinity Fraud
Affinity fraud takes place when a con artist claims to be a member of the same ethnic, religious, career or community-based group. “You can trust me,” says the con artist, “because I’m like you.” Learn more about affinity fraud and other scams.

Wiessmann also identified three emerging threats Pennsylvania investors should watch in 2018:

Initial coin offerings (ICOs)
ICOs– not to be confused with initial public offerings — are unregulated, crowdfunding methods to raise money for new business ventures, often used to bypass the rigorous and regulated processes required by venture capitalists or investment banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin. Learn more: www.sec.gov/news/public-statement/statement-clayton-2017-12-11

Cryptocurrency contracts for difference (CFD)
CFDs are complex financial instruments that enable an investor to speculate on the price of an underlying asset and can be highly leveraged, which multiplies the impact of price changes on profits and losses. Cryptocurrency CFDs allow investors to speculate on price changes in highly volatile cryptocurrency such as Bitcoin or Ethereum. CFDs, which are prohibited from being sold to U.S. citizens or residents, are marketed through Internet platforms and regulators caution that some of these platforms can be fraudulent themselves. Learn more: www.fca.org.uk/news/news-stories/consumer-warning-about-risks-investing-cryptocurrency-cfds

Identity theft for purposes of depleting investment accounts
Wiessmann also noted that, while technology has made some tasks easier, it has also made it easier for criminals to steal your personal information and financial security.

“Investments by their very nature involve some element of risk – no legitimate investment opportunity can advertise itself as ‘guaranteed,'” said Wiessmann. “One of the most important things an investor can do to protect their interests is to investigate – the product, service, company, and people trying to sell to you – before they invest their time and money.”

Investors can learn more about researching their investment decisions by vising the department’s Investigate Before You Invest online resource.

Anyone can contact the Department of Banking and Securities at 1-800-PA-BANKS or 1-800-600-0007 to ask questions or file complaints about financial transactions, companies, or products. Members of the public are also invited to connect to the department through Facebook and Twitter, or subscribing to the department’s newsletter.