Banking Commissioner Warns About 
"Top 5" Investment Scams
February 4, 2004 -

State Banking Commissioner John P. Burke today forecast that investors will be challenged with increasingly complex and confusing investment frauds in 2004. Burke identified the Top 5 schemes investors in Connecticut should watch out for in the coming year: 1) Ponzi Schemes, 2) Unscrupulous Broker/Dealer Representatives, 3) Affinity Fraud, 4) Internet Fraud and 5) Insurance Agent Fraud.

"Each year investors lose billions of dollars to securities fraud," said Commissioner Burke. "Con artists know all the tricks to scam investors and steal their hard-earned savings. We want to help educate investors about those tricks so they can make informed decisions with their money."

Connecticut's Top 5 List of Scams, Schemes and Scandals to Avoid in 2004:

1. PONZI SCHEMES. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors didn't get their promised returns.

An Oklahoma promoter of worm farms recently convinced hundreds of farmers, including several Connecticut residents, to invest in his business by guaranteeing them high returns for easy labor. One Connecticut woman claims to have lost $65,000 and her home after falling victim to this business scam.

Commissioner Burke advises, "Contact the Banking Department's Securities Division to find out if an investment or business opportunity is registered and consult with an attorney or accountant prior to signing any documents. Shady promoters will often reveal themselves by making promises that sound too good to be true. Be sure to be fully informed of both the risks and rewards. High returns are not achievable without higher risks."

2. UNSCRUPULOUS BROKERS. Despite the stock market's rebound in 2003, state securities regulators say they are still hearing from many investors about brokers cutting corners or resorting to outright fraud to fatten their wallets. A former stockbroker who embezzled $1 million from a Greenwich client while he was employed by a securities firm was ordered to pay $1,008,732 in restitution. He was sentenced to five years imprisonment, suspended after serving 18 months, to be followed by five years of probation.

3. AFFINITY FRAUD. Con artists know that it's only human nature to trust people who are like yourself. That's why scammers often use their victim's religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud. Commissioner Burke said, "These scam artists first gain the trust of their victims by using their common background or interest and then abuse that trust for their own advantage."

A fraudulent, unregistered securities dealer recently persuaded 24 clients, including several in Connecticut, to invest $646,000 in two phony investment funds by targeting people who shared the same ethnic background.

4. INTERNET FRAUD. With the Internet becoming a common part of daily life for increasing numbers of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyberfraudsters took in $122 million in 2002, according to the Federal Trade Commission.

Many consumers recently have received emails from shysters posing as legitimate banks asking that ATM card numbers, Personal Identification Numbers (PIN) or other sensitive information be confirmed. The emails are cleverly disguised to mimic real institution websites and logos. Commissioner Burke warned that banks never request such information from consumers via email. "If you receive such an e-mail, even if it appears to be from a legitimate source, do not provide your personal information," said Commissioner Burke. "Instead notify your banking institution or contact the Banking Department immediately." The agency has a web page warning about these and other cyber threats.

Commissioner Burke also warns investors to ignore e-mail offers from individuals representing themselves as Nigerian or West African government or business officials in need of help to deposit large sums of money in overseas bank accounts. Commissioner Burke said, "Don't be fooled by these scam artists. Delete their e-mails and ignore their empty promises."

5. INSURANCE AGENTS AND OTHER UNLICENSED SECURITIES SELLERS. While most independent insurance agents are honest professionals, unfortunately some are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. Oftentimes the agent may be hoodwinked himself by a promoter encouraging unlicensed sales. Remember - investments are not guaranteed and high returns cannot be promised without any corresponding risk. The person running the scam instructs the independent sales force - usually insurance agents but sometimes investment advisers and accountants - to promise high returns with little or no risk.

In recent years the Department has investigated many cases of agents who sold securities in the form of promissory notes to Connecticut customers. These unlicensed sellers have paid a high price for their conduct, receiving sanctions ranging from orders to cease and desist to fines of up to $20,000. Some individuals have even been barred from acting as broker-dealers or as investment agents in the state.

These five scams identified by the Connecticut Department of Banking have also been chosen by the North American Securities Administrators Association (NASAA) as part of their own top ten scams, schemes and scandals to look out for in 2004. NASAA recently conducted a survey of state securities regulators across the country and produced their list based on the order of prevalence and seriousness. The remaining five scams on NASAA's top ten list are: Senior Investment Fraud, Promissory Notes, Prime Bank/High-Yield Investment Schemes, Internet Fraud, Mutual Fund Business Practices and Variable Annuities.

SENIOR FRAUD. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior investors. State securities regulators said older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns.

PROMISSORY NOTES. A long-time member of the Top 10 list, these short-term debt instruments often are sold by independent insurance agents and issued by little known or non-existent companies promising high returns - upwards of 15 percent monthly - with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.

PRIME BANK SCHEMES. Another perennial favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as "risk free guaranteed high yield instruments" or something equally deceptive.

MUTUAL FUND BUSINESS PRACTICES. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America's 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators.

VARIABLE ANNUITIES. Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators are concerned that investors aren't being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. The benefits of variable annuities - tax-deferral, death benefits among others - come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees.

Commissioner Burke urges investors to visit the Department of Banking's Web site to learn more about common scams and ways to avoid becoming a victim. Persons with complaints or who feel they may have been victimized should contact the department at 260 Constitution Plaza, Hartford, CT 06103-1800; by calling (860) 240-8230 or toll-free 1-800-831-7225, or by Internet.