All investment opportunities are not created equal.
The North American Securities Administrators Association says that scam artists are hard at work trying to relieve unsuspecting retirement savers and other investors of their hard-earned assets.
The association recommends that investors be wary of private offerings, real estate investment schemes, high-yield investment and Ponzi schemes, affinity fraud, self-directed individual retirement accounts and risky oil and gas drilling programs.
Here’s what NASAA had to say about six schemes that can wipe out a retirement plan.
Private offerings. According to the association, fraudulent private placement offerings are the most common product or scheme leading to investigations and enforcement actions by state securities regulators. These are limited investment offerings that are highly illiquid, generally lack transparency and have little regulatory oversight. Because of the JOBS Act, these types of offerings, called Reg D/Rule 506 offerings, have a lot more leeway. The law relaxed rules that used to ban advertising of these schemes. Investors can expect to be bombarded with solicitations through social media, ads and billboards.
Real estate investment schemes. Investors need to be aware that schemes related to new real estate development projects or buying, renovating, flipping or pooling distressed properties are popular with con artists, the NASAA said. In its latest enforcement survey, NASAA found that real estate investment schemes were the second-most common product leading to securities fraud investigations by state regulators. Obviously, real estate is an important part of most investors’ portfolios, but the organization recommends that investors be wary of non-traded real estate investment trusts, properties that are bank-owned, pending short-sale, or in foreclosure.
High-yield investment and Ponzi schemes. If it sounds too good to be true, it probably is. Many retail investors fall prey to high-yield investments that promise really high rates of return. As with other alternative investments, high yield means higher risk and scam artists love these investments. NASAA recommends asking lots of questions. Scam artists will give a reasonably plausible explanation of why the investment is so good and they will try to make themselves look more credible by telling you how many credentials they have and that they are part of a particular, well-respected organization. Be wary!
Affinity fraud. Fraudsters and Ponzi scheme operators may join an organization you belong to as a way of “getting in” with their targets. Marketing fraudulent investment schemes to members of an identifiable group or organization continues to be a highly successful and lucrative practice for scamsters, NASAA found. Fraudsters know that people trust someone who is perceived to have a common interest, belief or background and use that trust to exploit members of specific groups. The most commonly exploited are the elderly or retired, religious and ethnic groups, and the deaf community. Investors should keep in mind that investment decisions should be made based on a careful evaluation of the underlying merits of the offer rather than common affiliations with the promoter.
Scam artists using self-directed IRAs to mask fraud. State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to a bogus venture. While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self-directed IRA. Custodians and trustees of self-directed IRAs may have limited duties to investors and won’t necessarily evaluate the quality, value or legitimacy of an investment or its promoters. Fraudsters also exploit the tax-deferred characteristics of self-directed IRAs and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means.
Self-directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals and private placement securities. Financial and other information necessary to make a prudent investment decision may not be as readily available for these alternative investments.
Risky oil and gas drilling programs. With the move toward alternative investments, retail investors are turning toward investments like oil and gas drilling instead of traditional stocks, bonds and mutual funds. Investments in oil and gas drilling programs typically involve a high degree of risk and are suitable only for investors who can bear the loss of the entirety of their principal. Some promoters will conceal these risks, using high-pressure sales tactics and deceptive marketing practices to peddle worthless investments in oil wells to the investing public, NASAA said. There are active investigations into suspect oil and gas investment programs in more than two dozen states and in every region of the U.S. and Canada. Investors should conduct thorough due diligence and assess their own tolerance for considerable risk when considering the purchase of interests in oil and gas programs.