Jan 23
2017

Most New Year's lists of the financial variety are inflicted on the public for no apparent reason. No one consistently predicts the direction of the stock market or can tell you the 10 Best Mutual Funds to buy or which mattresses will best conceal your cash.

The Texas State Securities Board’s list of top threats to investors can actually help you. From unregistered salespeople to common investment pitches that promise sky-high returns with no risk, the updated list helps you identify the people, products, and pitches that can wreck your financial life.

Please pay attention to these red flags. Your financial future will thank you.

Radio heads

Bad advice is bad advice, whether you hear it in person, over the phone, or on radio and television.

Having a media megaphone doesn’t make a person a financial expert. In fact, the advice can sometimes be toxic to your financial health.

Case in point: A Fort Worth investment adviser with a regular radio show had his registration revoked for fraudulent practices. He didn’t disclose his exorbitant commissions, concealed conflicts of interest, and for years sold securities without being registered.

And: A Frisco man made a name for himself in the Dallas-Fort Worth area through his radio show and investment seminars, but he was not the financial maven he claimed to be. He wasn’t even registered to sell securities.

According to an Emergency Cease and Desist Order, he engaged in fraud in marketing promissory notes tied to an internet advertising company, real estate development, and life settlement contracts.

Sound investing isn’t a gimmick and your investment decisions should not be influenced by how financial advice is delivered. It’s best to tune out the noise that makes it harder to invest wisely.

Emergency Action Filed Against Dallas-Area Investment Promoter

Fort Worth Investment Adviser Revoked for Fraud, Selling Without Being Registered

Unregistered Individuals

Plumbers must be licensed by the state. The same for cosmetologists, used auto-parts recyclers, and booting companies (the boots that immobilize your car).

It’s no surprise, then, that individuals and firms who sell investment advice and securities must be licensed as well. After all, a bad haircut will linger for a few weeks. Bad investment advice can ruin you.

Generally, anyone acting as a sales agent for a company selling stock, bonds, or other investments to the public must be registered to do so – a fact many investors don’t realize.

Almost all criminal actions undertaken by the State Securities Board involve unregistered persons.

Registering with the State Securities Board involves testing requirements, background checks, and periodic review. To see if a person is registered to sell investments, click here or call us at 1-512-305-8301.

If the person is not registered, that’s a three-story-tall red flag.

The ‘Genius’

Say an investment promoter promises you a return of 3% a week by trading foreign currencies on your behalf. All you need to do is invest $1,000 a month for the next 20 years and you'll be . . . let's see, interest compound biweekly, move the decimal point two places to the right, carry the "1" . . . a zillionaire!

That math makes as much sense as investment pitches that promise huge returns from trading in "alternative" products like forex, options, arbitrage, gold and silver and other commodities . . . the list goes on forever and the risk of fraud never ends.

Conventional investing – for most of us that means mutual funds – requires disciplined saving, knowing how much risk to take, and a willingness to accept inevitable declines in the markets. It takes time.

The genius trader, by contrast, typically promises investors a trifecta of quick results, unrealistic returns, and low risk. The genius' favorite terms are "no risk," "safe and secure," and "guaranteed."

Those promises are nothing more than an invitation to a potential fraud.

15-Year Sentenced for Stock-Trade Scam

Austin Forex Trader Ordered to Stop Fraudulent Offering

Social Media

In the tumultuous world of social media there’s always the next new thing, some way to reach out and connect with someone. That someone may be you, the target of a bogus investment pitch.

Social media has been a weapon for unscrupulous investment promoters for at least a decade, and its danger only grows.

There is no limit on the number of investment scams that can be promoted on standalone websites and via Facebook, LinkedIn, YouTube, CraigsList, and other online networks.

Investment promoters can just as easily lie to and mislead investors online as in print, however – maybe even easier. The apparent sophistication of a promoter and the professionalism of a website or social media channel are meaningless.

Emergency Cease and Desist Order Against Quixote Exploration LLC

Affinity Fraud

Churches, community organizations, retirement communities – all are fertile ground for affinity fraud, where a con artist exploits an affiliation with a group as a way to win an investor’s confidence.

A fraudulent investment scheme often spreads quickly among members of the group. The fraud often extends beyond the group to family members and friends.

Affinity fraud can turn into a Ponzi scheme, where early investors may – but not always – receive their promised returns with the money coming from later investors in the fraud.

Remember those research checks we talked about? Find out if a person is registered to sell investments by clicking here, or call us at 1-512-305-8301.

If the person isn’t registered, it doesn’t matter how close a friend is offering to sell you an investment.

U.S. v. Kurt Barton and Triton Financial LLC

Promissory Notes and High-Yield Investment Programs

Low yields on safe and secure products such as certificates of deposit and money market accounts have prompted some investors to look at alternative sources of income.

Promissory notes are one way that investment promoters – both registered and not – entice those investors.

But promissory notes often turn out to be scams when broadly marketed to the public. Promissory notes are basically IOUs from companies or individuals who generally have limited operating histories. The notes are sold to fund everything from property develop­ment to oil and gas exploration, or as a way to buy interests in a business partnership.

As an individual investor, you probably won’t be able to assess their creditworthiness, or evaluate the project that is supposed to generate enough revenue to pay the promised returns.

Legitimate promissory notes are generally marketed to sophisticated or corporate investors, who have the resources and expertise to evaluate the terms and conditions of notes and the companies behind them.

Also questionable are high-yield investment programs marketed as everything from “secured debt obligations” to investment contracts that promise to pay extraordinarily high returns.

Fraud Trials in Hood, Collin Counties Result in Sentences Totaling 95 Years

State of Texas v. William Charlton Mays IV

Real Estate

Real estate investing has to be safe, right? As the saying goes, “They’re not making any more land.”

It’s not that simple. Real estate investments are often sold through investment contracts, notes, and other securities. Promoters promise steady returns from a variety of investments.

Examples include the purchase, rehabilitation and sale of distressed houses and other property; the purchase of mortgage notes and real estate assets; and the development of shopping centers and other projects.

Investors should be skeptical of claims that real estate investment carries minimal risk because it is backed by a “hard asset.” Or, if the deal fails, the investor promoter points out that at least the land is still there.

Depending on the structure of the offering, risk factors may include the illiquidity of the investment; the impact of changes in interest rates on the profitability of the investment or the ability to sell or refinance property; and the effect that demographics, property valuation, or inventory of existing properties may have on the project’s revenue.

Perpetrator of $37 Million Real Estate Fraud Sentenced to 19 Years

Oil and Gas Investments

You live in Texas, where oil shaped the state economy. That doesn’t mean you know anything about investing in energy: How many potential investors can decipher geological maps, production reports, and filings with state energy regulators?

Oil and gas investments are highly speculative and complex. It is difficult for a potential investor to investigate a promoter’s claims about how much oil or gas will be produced and the time it will take to start production.

Do not rely solely on the promoter’s promises about any aspect of the investment. It’s also critical to know the background of the promoters – some may be inexperienced or have repeatedly failed in previous ventures, but may have not disclosed those facts to investors.

Even if the underlying project is legitimate, any revenue realized can be negated by commissions and other fees or expenses skimmed off by the managing partner, who typically sets the terms and timing of payments to investors. Interests in general partnerships or joint ventures are often non-transferable and illiquid.

North Texas Oil and Gas Scammer Sentenced to 22 Years

13-Year Sentence for Gambling with Oil Investors’ Funds

Stream-of-Income Investment

A pension is a valuable asset, just like disability payments or any benefit that is paid regularly to you.

Not surprisingly, there are people looking for ways to separate you from your benefits in “stream-of-income” investment transactions. These transactions involve a company acting as a middleman for buyers and sellers. Companies introduce investors to individuals who may want to sell income based on pension payments or government disability payments.

The transactions hold risks for both buyers and sellers.

Laws may prohibit the assignment of the stream of income/benefits. The seller typically maintains the legal right to redirect the payment, and if the seller does redirect the payment, the investor may be left with an unenforceable contract right.

In addition, the benefits are contingent on the life of the seller, and even life insurance policies on the seller’s life may be cancelled and do not protect an investor if a seller simply redirects the income stream. Persons who sell their benefits are often veterans and disabled persons. These individuals may be solicited when they are in financial distress, selling much needed future benefit payments at a significant reduction.

Firm Ordered to Stop Sale of Pension-Linked Investments

Life Settlement Contracts

You die, I cash in.

That’s the theory, at least, behind life settlement contracts, which are complex financial arrangements in which a company sells a third-party’s life insurance policy to an investor. The investor receives an interest in the death benefits, and the benefits are paid to the investor when the third party dies. Risks abound:

  • You will not have access to your principal or any returns until after the insured person dies.
  • Returns can’t be guaranteed because there’s no way to reliably predict when a person will die.
  • Investors face steep fees and costs, including commissions to salespeople.
  • Policy premiums must continue to be paid on the policy until the insured individual dies. An investor may have to pay more in premiums than expected. If the premiums aren’t paid, an investor risks losing some, or all, of the principal.

Promoters of Death-Benefits Fraud Sentenced to 10 Years