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Scam Avoidance: NASAA Identifies 2009’s Top Investor Traps

With investors under pressure from the struggling economy, North American Securities Administrators Association (NASAA) reminds investors to take stock of their financial education and arm themselves with the knowledge to sidestep “investor traps.”

Many of the traps identified by NASAA’s Enforcement Trends Project Group promise high returns to cash-strapped investors but provide little if any disclosure of risks and offer high commissions to aggressive sales forces.

This year, NASAA has identified the following as the greatest potential threats to investors:

  • Real Estate Investment Schemes: NASAA members have noted 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. NASAA notes that some homeowners, particularly seniors, may be attracted to reverse mortgages, which are a legitimate lending option. However, the resulting lump sum home equity payment makes them an attractive target for unscrupulous salesmen, who may attempt to direct these funds toward worthless or unsuitable investment products.

 

  • Leveraged Exchange-Traded Funds (ETFs): NASAA notes that this relatively new financial product has been offered to individual investors who may not be aware of the risks these funds carry. The funds, which trade throughout the day like a stock, use exotic financial instruments, including options and other derivatives, and promise the potential to provide greater than market returns as the value of the underlying assets rises or falls. However, given their volatility, these funds typically are not suitable for most retail investors, according to NASAA.

 

  • Private Placement Offerings: Private placements offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors as opposed to a public offering made through national securities markets. State securities regulators have observed a steady and significant rise in the number of private placement offerings that are later discovered to be fraudulent, especially those made under a federal registration exemption (Regulation D, Rule 506). Companies using this exemption can raise an unlimited amount of money without registering the offering with the SEC as long as they meet certain standards. Although properly used by many legitimate issuers, the exemption has become an attractive option for con artists, as well as individuals barred from the securities industry and others bent on stealing money from investors through false and misleading representations.

 

  • Ponzi Schemes: Despite the heightened awareness of Ponzi schemes following Bernard Madoff’s multi-billion dollar fraud and 150-year prison sentence, these scams continue to trap investors. The Ponzi scheme is a house-of-cards swindle in which high returns are paid to initial investors out of the funds of later investors, who end up losing all or most of their money to the promoter. NASAA urges investors to beware of investment opportunities promising high and steady rates of return.

Source: NASAA, an international organization devoted to investor protection, consisting of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

Don’t Let Personal Loans Ruin a Relationship


Now that banks have tightened their lending standards, it is more difficult to borrow money, and many people are turning to friends and family to borrow funds.

However, these loans involve more than just monetary concerns. Borrowers who fail to repay bank loans can face legal problems, but those who can’t make good on loans to friends or family can be hit not only with legal trouble, but also the loss of a personal relationship.

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The Pennsylvania Institute of Certified Public Accountants warns that smart steps are needed to prevent the loan from damaging a good relationship:

  • Consider Alternatives: Think about all your options before approaching someone you’re close to for a loan. Try more than one bank, for example, or explore borrowing possibilities at credit unions or other sources.
  • Put It in Writing: To protect your relationship and your wallet, it’s best to put it in writing. Write down the amount of the loan, when and how it will be paid off, and if the borrower will pay any interest. This kind of promissory note clarifies the borrower’s responsibilities and can help prevent misunderstandings later. The note should be signed by both borrower and lender, and each one should keep a copy.
  • Be Realistic: Written documentation is useful, but it may not prevent payment problems. For that reason, both parties need to be realistic before they enter into the deal. If you know that a loved one likely won’t be able to repay you, offer instead to help him or her solve their problems by developing a monthly budget or working out a payment plan with creditors. If you are uncertain you will be able to repay a loan, consider asking loved ones to help you brainstorm other borrowing options.
  • Give Honest Updates: If you borrow money from a friend or family member and find that you are unable to repay it as expected, let them know about the problem right away. Explain what went wrong and when you do think you’ll be able to make good. It may be a difficult conversation, but your candor and consideration for the other person will go a long way in helping to preserve the relationship.

Source: The Pennsylvania Institute of Certified Public Accountants (PICPA).


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