Over the past several years, Mississippi has unfortunately been home to some particularly heinous and well-publicized investment scams. Perhaps the best-known was a “ponzi scheme,” a kind investment-pyramid scam, in 2004 uncovered after an investigation by multiple state and federal entities, The perpetrators, who included a Jackson securities dealer, pleaded guilty to money laundering in connection with the scam that took more than 40 investors for $10.2 million.
And, the fallout did not end there. The fraudulent funds were deposited in AmSouth Bank. In October 2004, AmSouth Bancorporation was ordered to forfeit $40 million for not reporting the suspicious financial activity.
Though the case is two years old now, investment scams continue to prey on the uninformed. And, the scammers are constantly fine-tuning their cons. The North American Securities Administrators Association (NASAA) recently released its “Unlucky Thirteen,” the top investment traps in 2006. It includes some “oldies” as well as new rip-offs.
“Investors face an increasingly complex maze of scams and rip-offs,” said Mississippi Secretary of State Eric Clark, whose office (SoS) is charged with policing the state’s investment community. “Every year, con artists discover new ways to fleece the public. Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings, as well.”
However, there is good news. While the con artists and unscrupulous dealers have become savvier, so has the average investor. Education programs have helped arm Mississippi’s citizens with a weapon to fight off the scammers — knowledge.
Jim Nelson, assistant secretary of state for business regulation and enforcement, has noticed his division’s phones ringing more often these days. His team is fielding inquiries from a higher number of Mississippians eager to learn more about investment opportunities that have been offered them and the individuals or entities offering them.
Does this mean scams are on the rise in the Magnolia State? Nelson does not believe so. In fact, he sees the increased call volume as a positive.
“One of the functions of this office is investor education,” he said. “I believe we’ve done a very good job of getting information out to Mississippians about protecting themselves from scam artists. With this rise in awareness, many of the most egregious scams are headed off.”
That is not to say that scams are less of a threat to the state’s citizenry. In announcing the NASAA’s “Unlucky Thirteen,” the SoS office pointed to oil and gas investment schemes as a particular threat to Mississippians. Why? Hurricane Katrina dealt a harsh blow to the economy, and one of the most-reported and most notable impacts was on the oil and gas industry. The rising price of oil created fear, which is an emotion scammers love to prey upon.
Nelson said, “Anytime headlines are about a commodity becoming scarce or the price going up, scam artists will use that to scare people. Katrina heavily impact the oil and gas industry, and created an atmosphere ripe for oil and gas investment fraud.”
Education is also crucial in breaking down stereotypes of con artists. Most envision scammers as being unscrupulous, faceless criminals who use telecommunications to bilk the unwitting. However, many of the “Unlucky Thirteen” traps are perpetrated by licensed securities dealers through such activities as churning or simply offering unsuitable recommendations. Another is carried out by licensed insurance agents who are not licensed securities dealers.
Yet another is affinity fraud, which are particularly distasteful. The con artist targets a group, such as a church or ethnic group, using not an emotional appeal but rather seemingly careful analysis. Then, oftentimes these individuals and groups sell other friends and associates, unwittingly helping to entangle more in the deceitful web.
Nelson said his division pushes constantly to remind citizens that just because they know the person with whom they are dealing, that does not insure that the investment is sound.
“It is crucial that Mississippians do their homework,” he said. “Just because the person is your cousin or your best friend’s uncle doesn’t necessarily mean that the investment he or she is offering is a good one.”
Nelson pointed out that, by far, the majority of people who are calling the SoS with a complaint or concern are the potential victims themselves. Thus, it is important that Mississippians practice self-protection, and education offers that shield.
That is not to say that Mississippians are without support even beyond the SoS. Nelson’s division contains four attorneys, an investigator and five examiners, who are constantly in the field. He says his team is “very vigilant,” and meets every week to make sure all are playing from the same page.
The SoS also works closely with state and federal entities to find and bring scammers to justice, as the aforementioned ponzi scheme illustrated. That cooperation is sometimes extended to the local level, as well. For instance, if the SoS is conducting an investigation in a community, it will contact the sheriff’s office or police department to let them know what SoS personnel are doing.
And, the SoS is getting more help from non-governmental entities such as financial institutions. “Increasingly, banks and other financial institutions are calling to report suspicious activity,” Nelson said. “For instance, if a senior citizen comes in and promptly withdraws all of his or her money, that should raise concern. Banks are more and more often calling to report this kind of activity.”
Returning to the education theme, Nelson said it is crucial that prospective investors have all the information possible before handing over their hard-earned dollars. Calling the SoS to see if a dealer has drawn previous complaints, asking how long a dealer has been in business or requesting references are just a few quick, relatively easy ways Mississippians can safeguard against investment rip-offs.
Too, a large amount of protection can be gained by using a little horse sense. Nelson said in this area, everything investors needs to know they learned at home as a child.
“Your mother said it best — if it’s too good to be true, it usually is,” he said.
Contact MBJ staff writer Wally Northway at email@example.com.
The “Unlucky Thirteen” investment scams
In February, the Mississippi Secretary of State’s Office listed its “Unlucky Thirteen” investment scams based on a survey of state securities regulators conducted by the North American Securities Administrators Association (NASAA).
The top 13 investment scams, listed alphabetically are:
Affinity fraud — Known as a crime of persuasion, this pitch seeks to substitute an emotional appeal for careful analysis and increasingly is targeting religious, ethnic, cultural and professional groups.
Churning — An abusive sales pitch in which securities professionals make unnecessary and/or excessive trades in order to generate commissions.
Equity indexed certificates of deposit — These hybrid securities products, which offer an interest coupon payment or return based upon a stock market index, are not backed by the FDIC, and are not suitable for seniors.
Oil and gas investment frauds — With high oil prices, these complicated investments generally require a significant investment and are becoming more prevalent on the Internet.
Personal information scams — In the guise of filling out forms, con artists gain access information about personal financial assets.
Prime bank schemes — These schemes often promise high-yield, tax-free returns that are said to be “offshore trades of bank debentures.” There are no such debentures or high-yield returns.
Pump-and-dump schemes — Unethical broker-dealers frequently “pump up” the value of low-priced securities traded on the NASDAQ Pink Sheets, and then “dump” the stock after uninformed individuals have purchased the shares at inflated prices.
Recovery rooms — Scam artists buy and sell names of individuals and financial information of victims who have lost money to “recovery rooms,” which promise, for an advanced fee, to recover the money lost in a worthless investment.
Registered high-interest promissory notes publicly advertised — These products are sold by licensed insurance agents who are not licensed securities professionals who sell them as short-term, high-yield, low-risk investments.
Sale and leaseback contracts — These investments are structured to resemble the sale of a piece of equipment where the investor cannot service or maintain the equipment and must enter into a servicing agreement.
Self-directed pension plans — This scam may begin with advice to convert an employer-sponsored pension, insurance policies or deferred compensation plans into a self-directed pension plan.
Unsuitable recommendations — One size does not fit all. Securities professionals must know their clients’ financial situation and refrain from making recommendations of securities that they have reason to believe are unsuitable.
Variable annuities — These investment vehicles are tax-deferred products that typically place mutual funds inside of an insurance wrapper. They make sense only for consumers willing to invest for 10 years or longer, and are not suitable for many retirees who cannot afford to lock up their money for a long time.
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