In today’s complex financial world, there are many investment opportunities. Potential investors find themselves solicited by telephone calls, mailings, and e-mail. Some investment opportunities hold great promise of financial return; others do not.
No matter how you choose to invest your money, a degree of risk exists. The greater the “promise” of a return, the riskier the investment. Often, the investment that sounds like a sure winner is the invention of a con artist and should be avoided altogether.
Each year, investors in Texas lose millions of dollars to securities and commodities fraud. High-pressure salespeople promoting get-rich-quick schemes sell more than three-fourths of all investment frauds over the telephone. With their slick sales pitches, con artists will try to cash in on just about any type of investment. The techniques practiced by these swindlers are well rehearsed and often hard to resist.
Your best protection: Investigate before you invest.
Both legitimate brokers and con artists offer many investment opportunities. A legitimate investment can offer excellent returns, while a deal with a con artist is guaranteed to result in financial loss. Con artists commonly use the following techniques:
Investment scams are sold in many ways. The methods and promotions outlined here represent some of the most risky investment ventures; moreover, they are often illegal.
These common unreliable operations display impressive-sounding addresses and use high-pressure salespeople to make thousands of unsolicited telephone calls to potential investors. The term “boiler room” describes the “heat” and high pressure generated by the callers, as they try to convince investors to send in their money. In most cases, either the company or the product does not exist, or does not operate as represented. If you receive an unsolicited call offering a deal that sounds too good to be true, be careful. It probably is not true, and you are probably talking to a con artist.
In a Ponzi scam, con artists offer high rates of return on various impressive-sounding investments. However, instead of using the funds for investments, a portion of the original money is paid back to investors as their return. Satisfied investors report these high returns to their friends, who in turn invest. In reality, there is no underlying business; the early investors are simply being paid with funds received from later investors. When the scheme collapses, as it always does, current investors lose their money and the promoters walk away rich.
A typical pyramid scheme involves a few individuals at the top who recruit people to invest in their organization, tempting them with the promise of large sums of money if they bring in others. As more recruits invest, they too are expected to recruit others. Pyramid schemes focus on recruitment and the exchange of money; usually, there is no legitimate product being sold.
Pyramid schemes may be disguised as games, chain letters, buying clubs, motivational companies, mail order operations, or investment organizations. Although some pyramid schemes call themselves multi-level marketing operations, not all multi-level marketing companies are pyramids. When the emphasis is on recruiting new members rather than selling something of value, the organization is probably an illegal pyramid.
Oil and gas well interests are another common investment scam. By acquiring interests in a “proven” oil field or “surefire” wildcat well, investors are promised great riches. Often, however, the wells do not exist or hold no further reserves. Watch out for deals on “ore-bearing” dirt that promise fantastic mineral reserves and profits. These deals may be illegal. Claims of a “secret” or “new” formula for removing valuable minerals from old mines signal a scam.
These schemes attempt to sell “investment grade” coins or gold, silver, and platinum bars and bullion. Con artists claim that the value of the coins or metals will increase dramatically in the future. However, if you send money, no coins or metals are shipped to you. Instead, you are told the coins and metals have been deposited in a vault or bank with an impressive name. Even if they have been deposited, their value is usually much less than was represented to you. The high commissions charged by the seller would require a great increase in the value of the coins or metals before you could break even. Worse yet, the coins or bullion may not even exist; the promoter may simply pocket your money.
This type of transaction involves loaning money to someone who wishes to purchase or refinance real estate. The investor counts on receiving interest payments as the return on the investment, and expects to receive the title to the property if the borrower defaults. More often than not, the borrower is unable to repay the loan. The investor may discover that the property’s value does not cover the investment or that the deed was not recorded in the investor’s name.
Investors are frequently approached to buy investments that are tied to recent technological developments or scientific breakthroughs. While such investments can be legitimate, often these opportunities are scams dressed in high-tech language. These schemes are designed to take advantage of investors’ familiarity with news events.
These red flags should alert you to the possibility of a scam:
Before you invest, investigate the company, the salesperson, and the investment by asking questions and checking references.
You should thoroughly understand the investment before you invest. Do not be afraid to ask questions and write down the answers for future reference. Some of the most important questions you should ask the person selling the investment are:
Call the local Better Business Bureau
Or your local law enforcement agency to see if they have received any complaints about the company, the salesperson, or the investment.
Check with the Registration Division, Texas State Securities Board
By calling (512) 305-8300 to see if the firm or salesperson is registered to sell investments in Texas. Also, ask if the investment is registered for sale in Texas.
Contact the Financial Industry Regulatory Authority (FINRA)
On their toll-free, hotline to get information about the firm and the salesperson. (800) 289-9999. (9 a.m. to 5 p.m. EST)
Phone the Enforcement Division, Texas State Securities Board
By calling (512) 305-8300 to see if that office has received any complaints about the company.
The best way to stop investment fraud is to prevent it from occurring. Do not be afraid to ask questions and to investigate investment opportunities before you invest. The Texas State Securities Board is here to help you. If you have questions about securities regulations or have encountered potential investment fraud, please call our office at (512) 305-8300.
