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OFIR’s Top Ten Investor Traps

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DETROIT (WWJ) - The Office of Financial and Insurance Regulation (OFIR) released its annual list of traps that cautious investors should avoid when seeking to jump-start their investment portfolios.

OFIR Commissioner Kevin Clinton said before you put one dime of your hard earned money into an investment, we can run a check on any broker, advisor or product.

Affinity Fraud: Scam artists continue to prey on investors’ memberships or associations with an identifiable group, causing them to let their guard down and trust the legitimacy of an investment. Typical affinity groups include religious, ethnic, professional, educational, language, age and any other group with shared characteristics that allow investors to trust members of the group.

Ponzi Schemes: In a Ponzi scheme, a criminal promises big returns from bogus investments and pays the initial investors with money collected from new investors. With money in hand, the investment may seem legitimate, but investors don’t know they’re being paid inflated returns off the borrowed money from the new investors. 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.

Commodities Investments: Scam artists use the prices at the pump or headlines that have precious metals at an all-time high to entice consumers into investing into schemes involving commodities like oil, gas, gold and silver. A scammer may claim to have a “guaranteed” investment opportunity in an oil refinery or gold mine extraction, but in many instances the fraudulent investment never existed.

Senior Citizen Investment Fraud: Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combine to create a perfect storm for investment fraud against senior citizens. Older investors continue to be targeted at so-called “free lunch” investment seminars with unsuitable investments or scams involving unregistered securities, promissory notes, charitable gift annuities and Ponzi schemes all promising inflated returns.

Green Schemes: Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers. Scammers are trying to exploit the rising national interest in environmental innovations tied to “clean” energy, such as solar and wind energy, carbon credits and other alternative energy financing.

Real Estate Investment Schemes: OFIR has seen a rise in scams disguised as offers to help homeowners caught up in the turbulent housing market “save” their homes or “fix” their mortgages, usually in exchange for a fee paid in advance. Most of these advance-fee offers only generate a quick profit for the con-artist and provide no benefit to the consumer.

Exaggerated Credentials or Bogus Designations: OFIR investigators have encountered salespeople pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent registration numbers. Others have boasted of impressive sounding designations that prove to be meaningless, such as “Senior Specialist.” In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with OFIR if they have any suspicions about claimed credentials.

Fraudulent Promissory Notes: Investors may be enticed by the promise of big returns through a private, informal loan arrangement, but may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes 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. Often initially pitched as personal loans or short-term business arrangements, most promissory notes and the persons who sell them must be registered with OFIR.

Investments Offered by Unlicensed Agents: OFIR has identified unlicensed professionals selling securities or offering investment advice. For example, investors are often unaware that their insurance agent may not be licensed to sell securities products or give investment advice. These recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.

Unsuitable Investments: What might be suitable for one investor might not be right for another. Securities professionals must know their customers’ financial situation and refrain from recommending investments they have reason to believe may not be appropriate for a customer’s age, risk tolerance and need for access to the money.

If Michigan investors have any questions or complaints regarding an investment firm, professional or product, they should contact OFIR toll-free at 877-999-6442. Find more information at michigan.gov.

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