NASAA Announces Top Investor Threats

Posted on December 20th, 2013 at 8:51 AM

        From the Desk of Jim Eccleston at Eccleston Law Offices:

     Every year state regulators from NASAA (North American Securities Administrators Association) compile a list of the “Top 10” investor traps.  Those are the financial products and practices “that threaten to trap unwary investors.”  The list varies from year to year, though several appear as “persistent threats.”  Let’s review those persistent threats as well as the new threats on the radar screen of state regulators.

            New Threats  NASAA is concerned with crowdfunding and Internet offers facilitated by the 2012 JOBS Act.  Although Internet fraud is not a new threat, the JOBS Act likely will increase the amount of small business offerings made through the Internet.  The state regulators note that “small startups are among the riskiest of investment categories under the best of situations.”

            Another new threat is inappropriate advice or practices from investment advisers.  After noting the heightened, fiduciary duty which investment advisers owe their clients, NASAA reports that its increasingly intensive regulatory efforts examining investment advisers have resulted in increased enforcement actions being brought against investment advisers.  NASAA expects that this trend – a near doubling of enforcement actions since 2011 – will continue for some time, in part because many investment advisers have not been audited in many years if at all.

            A third, new threat relates to scam artists using self-directed IRAs to mask fraud.  The state regulators report that fraudsters are using self-directed IRAs as a way to increase the appeal of their fraudulent schemes.  This is done through misrepresenting the role of IRA custodians.  NASAA points out that such custodians “only hold the assets in a self-directed IRA and generally do not evaluate the quality or legitimacy of any investment.”

            A final, new threat relates to EB-5 Investment-for-Visa schemes.  Although the immigration program is 20 years old, NASAA warns that unscrupulous promoters “may seek to prop up the plausibility of their scheme by highlighting a connection with the federal jobs program.”  Investors must seek to obtain full information relating to a program and its sponsors.          

            Persistent Threats  Among persistent threats, gold and precious metals return to the list. NASAA warns, “The hype surrounding gold, silver and other precious metals continues despite both the fact that these investments are just as vulnerable to risk as others, and signs that some precious metal markets are declining or increasingly turbulent.”

            Risky oil and gas drilling programs likewise again makes the list.  NASAA notes that there is superficial appeal to those off-Wall Street investments.  But they “often prove to be a poor substitute for traditional retirement planning.”  They typically involve a high degree of risk, and are suitable only for those investors who can lose all of their investment.  Further, risks often are concealed through high pressure sales tactics and aggressive marketing practices. 

            Another persistent threat relates to promissory notes.  Those private loan agreements are the favorite vehicle for Ponzi schemes.  By offering higher than normal interest rates, downplaying illiquidity, and concealing risk of loss, promoters can hide the true nature of those speculative investments.

            Real estate investment schemes due to the distressed real estate market appear once again this year on the list of top threats.  Con artists have crafted schemes relating to buying, renovating, flipping or pooling distressed properties.  Even “legitimate” real estate investments in this category are high risk.

            Regulation D Rule 506 private offerings likewise is a recurring investor threat.  This category relates to any company privately raising capital.  The offerings typically lack transparency, are illiquid and have little or no regulatory oversight. 

            The final threat on the list relates to unlicensed salesmen giving liquidity recommendations.  NASAA attributes this threat to insurance-licensed firms or agents not registered to sell securities.  The state regulators describe this as a “significant source of complaints and inquiries for the states.”  The sales pitch normally comes on the heels of stock market volatility, with false promises of safety and guaranteed income.  NASAA notes that annuities may be appropriate for many investors; the problem is that they may not be suitable for all investors if those investors must liquidate their securities holdings to purchase them.

            As one can see, there are many traps for the unwary.  Investors must be on guard to avoid being duped!

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston


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