LARA’s Corporations Securities and Commercial Licensing Bureau (CSCL) today released its list of common investment scams and traps that cautious investors should avoid when seeking to jump-start their investment portfolios.
“We want to educate Michigan consumers of common investment scams and stop fraud up front before investors are harmed,” said CSCL Director Julia Dale. “To be an informed investor, learn to ask the right questions, do your homework, and verify claims through independent sources. Investors should always feel free to call us if they have a question or concern.”
CSCL joins with North American Securities Administrators Association – of which it is a member – to identify the most common investor scams and traps:
Promissory Notes. Investors should be cautious by the promise of big returns through private, informal loan arrangements, and may suffer deep losses investing in an unregistered or fraudulent promissory note. These notes can be official looking and give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations. Promissory notes may not be suitable for retirement funds and can be vehicles for fraud. Most promissory notes and the individuals who sell them must be registered with CSCL or comply with a registration exemption.
Real Estate Investment Schemes. “Hard-money lending” and “property flipping” are the most common scams of earning quick money through investments related to real estate. Hard-money lending refers to real estate investments financed through means other than traditional bank borrowing. Investors may be tempted by the opportunity to earn greater rates of return by participating on a hard-money loan and may not appreciate the potential risks. Property flipping is purchasing distressed real estate, refurbishing it, and then immediately re-selling it in hopes of earning a profit. A scammer may defraud potential investors in the flip by misrepresenting the value of the underlying property or its profit potential.
Ponzi Schemes. In a Ponzi scheme, investors are promised big returns from bogus investments with initial investors being paid with money collected from new investors; this is sometimes referred to as “robbing Peter to pay Paul.” Eventually, nobody gets paid. The underlying investment may be vague (i.e., offshore investment, high yield investment programs) and claims are usually entirely fictional. Very few, if any, actual physical assets or investments generally exist. The scam relies on a constant recruitment of new investors to keep it going, but when that well runs dry, the scheme collapses like a house of cards, leaving investors holding the bag.
Affinity Fraud. Con artists frequently prey on investors in closely knit religious, political, professional, ethnic or social groups, causing them to let their guard down and trust the legitimacy of an investment. Affinity fraudsters are members – or pretend to be members – of the group and realize that it’s often easier for victims to trust someone who appears to be like them. They offer a promising investment opportunity — that pays a high rate of return and then uses a variety of high-pressure tactics to exploit victims and get their victims’ money. Trust does not replace due diligence. Don’t be scammed into thinking you’re getting a great deal promised by a trusted friend or member of your group.
Consumers in Michigan are reminded that securities professionals, including agents and investment adviser representatives, are required to be registered or exempt from registration to provide investment advice or sell securities.
Before entering into an investment, Michigan consumers are encouraged to verify the registration status of persons soliciting the investment. They can check for broker-dealer agent registration at https://brokercheck.finra.org or investment adviser representative registration through https://adviserinfo.sec.gov. CSCL can run a registration check on securities products.
CSCL can be reached at 517-241-6345 or online at: www.michigan.gov/securities. Consumers wishing to file a complaint regarding a securities product or professional, can find a complaint form on the bureau website.
Investors are reminded that there is no replacement for their own due diligence.