Bernard L. Madoff’s $50-plus billion Ponzi scheme is a distressing reminder that anyone can be scammed—both big-time, sophisticated investors and people with smaller sums to invest.
In this uncertain economy, that’s a particular concern to securities regulators, who are seeing a rise in fraudulent investment schemes as con artists promise high returns at little or no risk. “People forget that they can only make a return if they take a risk,” says Joseph Borg, director of Alabama’s Securities Commission.
Despite the recent headlines, scammers continue to dupe nervous investors, saying that they will turn foreclosed properties with ridiculously low prices into guaranteed moneymakers or falsely touting high rewards from alternative energy sources, to cite just two examples.
There’s also a new and disturbing scam in which Internet hackers steal investor user names and passwords to gain access to trading accounts. Then they sell the securities in the accounts or replace them with thinly traded stocks that, not so coincidentally, were purchased by the hackers in separate accounts. The trades inflate the price of those stocks, which the hackers then sell from their own accounts for a profit. The victims are sometimes left with worthless portfolios.
That’s what happened to an investor who had $180,000 in cash and equities in his online brokerage account before leaving on a five-day fishing trip. He returned to find a $200,000 negative balance.
John Reed Stark, chief of the Securities and Exchange Commission’s Office of Internet Enforcement, says that in most cases the agency doesn’t know exactly how the user names and passwords are obtained. One possibility is that crooks use malicious software programs to monitor a computer’s activity. Sometimes, victims disclose personal information by responding to online job listings or phony e-mail solicitations supposedly from banks seeking to update security information.
Brokerage firms have been covering the losses, though they have argued that they’re not obligated to, Stark says. “Recently we’ve become aware of certain brokerage firms that are not,” he adds.
You can protect yourself by beefing up your computer’s security, Stark says. Specifically, be careful about what you download, avoid using public computers for online investing or other personal financial business, and encrypt your wireless connection. Never respond to e-mail messages seeking personal information. Monitor your accounts regularly, and report any discrepancies immediately.
Here are other scams on the regulators’ radar—and advice on avoiding them.
Although crude-oil prices have dropped, the memory of $4-a-gallon gas has prompted several fraudulent energy deals, especially new drilling partnerships in abandoned oil fields. Drilling deals have always been a gamble but they’re even riskier now, warns the North American Securities Administrators Association. This type of investment is speculative and illiquid, and can have a long holding period, according to the group.
Also beware of solicitations to invest in energy-saving devices. In October, after an Alabama Securities Commission investigation, the authorities arrested a man for allegedly collecting $220,000 to develop and market a device that supposedly reduced electrical power usage and the risk of shock. “The bottom line is it didn’t exist,” Borg says.
If you’re intrigued by such investments, check with your state securities regulator to make sure both the seller and the investment are registered, he advises.
When tax time approaches, Borg expects an increase in “IRA approved” investment schemes. Touted on TV infomercials and radio ads, these plans promise sky-high returns—often 200 to 800 percent—for moving money from IRAs into deals such as real-estate mortgage pools; new technology (wireless cable TV and specialized mobile radio); or exotic farming (ostriches and emus).
Although it is legal to put almost any investment into an IRA, there is no such thing as an IRA “approved,” “qualified,” or “sanctioned” plan. And avoid any investment that suggests endorsement by the Internal Revenue Service. Don’t rely on claims made in TV infomercials or radio ads, and always be wary of investments that promise sky-high returns with no risk.
When bad news about a company spreads online, stock prices can swing sharply. For example, last year an old news story was accidentally republished suggesting that United Airlines was going to file for bankruptcy again. The stock slumped 75 percent, and trading was halted until United set the record straight.
An online rumor could come from a scammer trying to manipulate stock prices, so don’t make snap investment decisions based on one. “Never make an investment decision so quickly,” Stark says. “Do your homework, and do not jump just because you hear a rumor. You’re not a professional trader.”
This article was published in the April 2009 issue of Consumer Reports Money Adviser.