The Delaware Department of Justice released its annual list of top investor threats and reminded Delawareans to use caution when approached with any unsolicited investment opportunities.
The top threats were determined by surveying members of the North American Securities Administrators Association, of which the Delaware Department of Justice is a member, to identify the most frequently identified source of current investor complaints or investigations.
The most often cited were:
— Promissory notes: A promissory note is a written promise to pay or repay a specified sum of money at a stated time in the future or upon demand. Investors are encouraged to be cautious about promissory notes with durations of nine months or less, as these notes generally do not require federal or state securities registration.
— Real estate investments: The promise of earning quick money through investments related to real estate continues to lure investors. Investors should be cautious about real estate investment seminars, especially those marketing real estate investments aggressively as an alternative to more traditional retirement planning strategies involving stocks, bonds and mutual funds.
— Ponzi/pyramid schemes: A Ponzi scheme is a ploy wherein earlier investors are repaid through the funds deposited by subsequent investors. In a Ponzi scheme, the underlying investment claims are usually fictional; few, if any, actual physical assets or investments generally exist. As the number of total investors grows and the supply of potential new investors dwindles, there is not enough money to pay off promised returns and cover investors who try to cash out. Similarly, a pyramid scheme is a fraudulent multi-level marketing strategy whereby investors earn potential returns by recruiting more and more other investors. What makes a multi-level marketing strategy into a fraudulent pyramid scheme is the lack of an underlying investment enterprise or product upon which the strategy can hope to be sustained.
— Oil and gas investments: Oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. Because these ventures are so speculative, the potential for fraud is rife. Scammers may misrepresent the likelihood that an oil or gas well will be successful — or may not even ultimately drill a well at all.
— Affinity fraud: In an affinity fraud, a con artist uses some sort of connection with the victim as the basis for the fraud. Affinity frauds may involve people who attend the same church, belong to the same club or association or share a common hobby. The con artist knows it is often easier for victims to trust someone who seems to be like them. Once a victim realizes that he or she has been scammed, too often the response is not to notify the authorities but instead to try to solve problems within the group.
— Variable Annuity Sales Practices: Variable annuities are hybrid investments containing securities and insurance features. While these products are legitimate, they are not suitable for all investors. Senior investors, in particular, should beware of the high surrender fees and steep sales commissions agents often earn when they move investors into variable annuities. Investors should be especially wary of any broker who wants to sell a variable annuity to hold inside a qualified retirement plan, such as a 401(k) plan or individual retirement account, as these types of retirement account will already benefit from tax deferment.
For more, visit attorneygeneral.delaware.gov/fraud/ipu or call 577-8424.