Top Ten Internet and Other Frauds
The following list has been fraudulently and shamelessly copied from a web page operated by the California Department of Corporations at http://www.corp.ca.gov/pub/tips10att.htm and somewhat modified. These problems are not limited to California nor the US. Recently, a friend in India got caught in one of these schemes.
1. Affinity group fraud (several major recent cases) These involve the breach of trust and fraud on religious, ethnic and professional groups by members of these groups or persons claiming to want to assist these groups. Targeted advertising in the media is used to identify potential victims, often with offers of employment or financial advice.
For example, Asian communities in southern California have recently been targets of bogus investments in precious metals and foreign currencies allegedly being traded on the Hong Kong Exchange. Unscrupulous promoters rely on the financial crises in Asia and elsewhere to entice investors to invest in speculative foreign currency investments, usually on unregulated or non-existent foreign exchanges. Typically, the promoter just steals all the money and no investments are actually made.
2. Internet fraud These include illegal and fraudulent investment offerings, market manipulation, insider trading and unlicensed broker-dealer, agent and investment adviser activity on the Internet. In one case the department stopped a $100 million scam on the Internet involving investments in viatical insurance settlements (see below).
The department has issued 39 Desist and Refrain Orders to a total of 158 subjects, has filed one civil injunctive action and obtained a preliminary injunction against 26 defendants, and has referred two cases for criminal prosecution in offerings on or involving the Internet. (Dates not given.)
3. Abusive sales practices by licensed broker-dealers and agents Among them are sales of securities to unsuitable investors, failure to disclose critical information and fraudulent offerings of securities and market manipulation, particularly in the microcap ("penny stocks") marketplace. These have become increasingly common and are a great concern.
On-line trading and day trading of securities have raised issues of trade execution, licensing, suitability and disclosure which both the California Senate and the US Senate Permanent Subcommittee on Investigations holding hearings about them.
4. Investment seminars and financial planner activity There is a proliferation of investment seminars and financial planners offering investment advice by people who are not licensed as investment advisers. There can be a lack of disclosure of conflicts of interest and hidden fees and commissions.
5. Telemarketing fraud As many as 100 new boiler rooms, or high pressure telephone sales operations, have opened in Los Angeles alone in the last year. They sell illegal and fraudulent investment products; many of them are making as much as $US 1 million a month.
They will say anything to convince the investor to part with his or her money because they have no intention of delivering on their promises. The best way to protect yourself: hang upthe telephone on unsolicited sales calls.
6. Ponzi/Pyramid schemes/Bunco This fraud was named after the infamous Charles Ponzi. They are swindles in which tremendous rates of return are paid to initial investors out of funds from later investors, who lose all of their money when the house of cards falls down.
A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all the emphasis on bringing in new members/investors and not on selling the product or service.
Recently, there have been a large number of promissory note cases in which overvalued or non-existent assets or debt allegedly secures investments. Another common scheme offers investments in alleged "prime bank interests" of world banking entities, but there is no such thing.
7. Viatical investment scams Viatical investments are one of the hottest new investment products in the marketplace, and also one of the riskiest. Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients (such as AIDS and cancer patients).
The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in their final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker.
These are being heavily marketed as humanitarian investments to the elderly and for IRA accounts (retirement savings accounts) for whom they are entirely unsuitable. Because of the uncertainties involved in predicting when a person is going to die, even with a terminal disease, these investments must be considered extremely speculative and are only appropriate for persons willing to risk losing all their investment.
8. Illegal franchise offerings These relate to inadequate disclosure and fraud in connection with the offering of franchise investments. They are often offered through business opportunity and franchise shows that target those seeking to invest in a business that they can run themselves.
9. High tech products and services These are illegal offerings of high tech investments that target unsophisticated investors with promises of high profits and no risk. The promise is to get in on the "ground floor" (the beginning) of the latest high tech products and services. Some of these are 900 number investments (the caller pays the people they are calling as well as the telephone company), Internet service providers (ISPs) and high tech virtual reality shopping malls.
10. Entertainment Many scams offer opportunities for investments in movie deals and other entertainment products with promises of guaranteed profits. They emphasize the profitability of many popular entertainment vehicles without mentioning the risk.
A critical step in wise investing for any investor is taking the time to check the backgrounds of brokers and advisers before entering into financial relationships with them.
The California Department of Corporations regulates firms and individuals in the securities and investment industry, including stockbrokers, investment advisers, and financial planners and can provide information about licensed firms and their agents and representatives.
For California residents: Information or complaint forms may be obtained by calling any of the Department's four offices: Los Angeles (213) 576-7505; San Francisco (415) 557-3787; Sacramento (916) 445-7719 and San Diego (619) 525-4233. Everyone is invited to access the Department of Corporations' web site at www.corp.ca.gov .
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