Securities Fraud 101

Con artists practicing securities fraud can strike investors through a variety of scams and schemes. Here’s a list of red flags and common scams.

Red Flags

Con artists prey upon our emotions – our hopes and dreams, even our fears. They are very good at what they do. Duping people is what they do for a living. That said, there are some red flags that can help you spot a con artist and avoid falling victim to their scam.  

The seller isn’t licensed or registered.
icenses and registrations can be easily reviewed using the registration search on the Securities Portal.  Individuals and firms in the financial services industry must meet certain requirements in order to be licensed.  Another valuable resource for determining whether an individual or company is registered is BrokerCheck by FINRA. Taking time to research both the seller and investment offer could save you in the long run. 

No written information is provided.
Ask for a prospectus or disclosure statement.  These are legal documents that provide details about an investment offering. The prospectus, or “offer document,” will contain the facts and information you need to make an informed investment decision. 

The sales pitch is rushed and aggressive.
You should be suspicious of any seller who pressures you to “act now” or says this is a “limited time offer.”  If they are pushing you to make a decision immediately, it is probably because they do not want you to find out that the investment is a scam.   Also, anyone who won’t take “no” for an answer is probably up to no good.

The seller is hesitant to answer your questions.
on artists seem to have an answer for everything, but if your questions make them uncomfortable, it’s best to walk away.  Infamous Ponzi schemer Bernie Madoff once said he only turned away people who asked too many questions. 

The seller promises high returns with little or no risk.
eturns and risks go up and down together.  If you want a chance at high returns, you have to accept high risks.  If you’re a low risk investor, chances are the returns will be modest.  Also, there is no such thing as a “no risk” investment.  All investing comes with some risk attached. 

You’re asked to keep this “exclusive” offer a secret.
Con artists don’t want to be caught, and so they pick their victims carefully.  They don’t want you telling someone who might uncover the scam.

Trust your instincts. 
Many victims report feeling uneasy about the decisions they were making.  Just know that if an offer sounds too good to be true, it IS – no probably about it.  If you are ever hesitant about an investment or need to know whether an individual, company or product is registered, please contact the Indiana Secretary of State, Securities Division.
 

Common Scams

Affinity Fraud
This type of fraud preys on the trust of members of a targeted group, organization, or community by exploiting similarities of the members.  It works because it’s human nature to trust people who have similar interests or beliefs.  Victims typically targeted by this type of scam are religious and ethnic groups, the elderly, recent immigrants, and business associates.  Members of the group often find it hard to believe that “one of their own” could be scamming them.  What’s worse is victims are hesitant to report affinity fraud because they don’t want to pursue legal action against someone in their social circle.  Just remember that your investment decisions should be based on a careful examination of the offer rather than your relationship with the person promoting the investment. 

Cryptocurrency
Cryptocurrencies burst into the investing mainstream in 2017 as the values of some virtual coins and tokens skyrocketed, led by Bitcoin. Shortly after, the news featured coverage of new cryptocurrencies, coin exchanges, and related investment products. Stories of “crypto millionaires” attracted some investors to try their hand at investing in cryptocurrencies or crypto-related investments. But stories of those who bet big and lost also began appearing and continue to appear.

Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds. And because these products do not fall neatly into the existing federal/state regulatory framework, it may be easier for the promoters of these products to fleece you. Investing in cryptocurrencies and related financial products accordingly should be seen for what they are: extremely risky speculation with a high risk of loss.

You can learn more about cryptocurrency scams from the North American Securities Administrators Association (NASAA).

Oil and Gas Ventures
Some of the riskiest investments capitalize on current events and consumer fear. A prime example of this fraud concerns oil and gas ventures. In oil and gas ventures, con artists use the rising price of fuel and what investors learn on the news about wars and terrorism to make them believe there are easy gains to be made.

Consumers should understand that even when an oil and gas opportunity is legitimate, it is still a risky venture and should be approached with caution. But unfortunately, the reality of oil and gas opportunities is that they can often be fraudulent. Investors often find out too late that their "great opportunity" is linked to fraudulent activities and dry or nonexistent wells. The investor who lands in one of these bad investments is commonly dealing with unregistered agents, unregistered securities offerings, misinformation, unsuitable investments, phony profits, or even outright theft.

Oil and gas venture offers are also often touted by high-pressure telemarketing sales—often known as boiler room tactics—or through solicitations. The fraudulent activities are usually set up with the firm's office in one state, the operations and physical location in another state, and the offering in a third state. Spreading things out like this allows the con artists to delude the investors for a longer period of time, because when offices and sites are not within an accessible distance, the investors are less likely to try to stop by the office or site.

Oil and gas drilling programs involve a high degree of risk, so they’re only suitable for investors who can bear a substantial loss.  You need to carefully investigate the offering and consider your own risk tolerance before investing.

Ponzi/Pyramid Schemes
Ponzi schemes operate under the notion of "robbing Peter to pay Paul." Although the original scam—orchestrated by get-rich-quick entrepreneur Charles Ponzi—dates back to the 1920s, its tactics are still widely used today. While high returns are promised to investors, the only people who consistently make money are the promoters who set the schemes in motion.

A Ponzi scheme uses money from new investors to repay previous investors. Sometimes referred to as a type of pyramid scheme, the promoter relies on investments from each new layer of victims to support previous layers of investors who are expecting certain promised returns. When the con works, it appears that the "investment" is legitimate and performing as represented by the promoter. But inevitably, the pool of new victims cannot support the previous investors, the pyramid crashes, and many victims lose their assets. Other times, the operator flees with all the proceeds.

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. Promissory notes generally pay interest, either periodically before maturity of the note or at the time of maturity. Companies may sell promissory notes to raise capital, and usually offer them only to sophisticated or institutional investors. But not all promissory notes are sold in this way.

Promissory notes may be offered and sold to retail investors. Such notes must be registered with the Securities and Exchange Commission and/or the state(s) in which they are sold or qualify for an exemption from securities registration. Most promissory notes sold to the general public also must be sold by securities salespeople who have the appropriate securities license or registration from their state securities agency.

Promissory notes from legitimate issuers can provide reasonable investment returns at an acceptable level of risk, although state securities regulators have identified an unfortunately high number of promissory note frauds. Individuals considering investing in a promissory note should thoroughly research the investment – and the people promoting it. Investors should be cautious about promissory notes with durations of nine months or less, as these notes generally do not require federal or state securities registration. Such short-term notes have been the source of most (though not all) of the fraudulent activity involving promissory notes identified by state securities regulators.

In Indiana, 18 elderly investors lost nearly $1.4 million in a promissory note scam. An 80-year-old woman lost her life savings of $324,000. The perpetrators – who diverted the money to offshore bank accounts, made first-class business trips to China, India, and Greece and bought expensive cars – even knelt in prayer with their victims to gain their trust.

Real Estate Investment Schemes
The promise of earning quick money through investments related to real estate continues to lure investors. Real estate investment scams are a perennial investor trap. There are a lot of schemes related to the development, purchase, renovation, and flipping of distressed properties. 

State securities regulators caution investors about real estate investment seminars, especially those marketed aggressively as an alternative to more traditional retirement planning strategies involving stocks, bonds and mutual funds. Attendees at these seminars may hear testimonials from people claiming to have doubled or tripled their income through seemingly simple real estate investments. But these claims may be nothing more than hot air.

Two of the most popular investment pitches involve so-called “hard-money lending” and “property flipping.” Hard-money lending is a term used to refer to real estate investments financed through means other than traditional bank borrowing. (This type of loan gets its name from the fact that it would be “hard to get” from a traditional lending source.) Property flipping is the practice of purchasing distressed real estate, refurbishing it, and then immediately re-selling it in hopes of earning a profit. A property flipper can use its own money to finance the flip or can seek financing from others. Property flipping financed through borrowed funds or outside investments can be done entirely lawfully, but it can also be a source for fraud.

Unregistered Securities
Many consumers invest their money in securities. Securities—investments with a potential for loss, but with the expectation of return—can include different investments with varying degrees of risk. Securities may include, but are not limited to:

• Stocks
• Bonds
• Oil and gas ventures
• Promissory notes
• Viaticals
• Mutual funds
• Investment Contracts

When unregistered securities are sold, con artists often promise high returns on opportunities that they can't guarantee. These frauds prey on victims by using high-pressure tactics, not giving the victims enough time to check out the investment first.

These unlicensed brokers bypass state registration requirements to pitch viatical settlements, pay telephone contracts, ATM leasing contracts, and other "limited or no-risk" investments. Con artists also prey on consumers who may not know that they can call securities regulators for assistance.
 

Helpful Resources

File a Complaint
Registration Search
Senior Fraud