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News Release: 99-09

GRAY DAVIS, Governor
Date: 06/07/99

WILLIAM KENEFICK, Acting Commissioner

State Issues Updated Top 10 Securities Fraud Scams

 

Sacramento, June 7, 1999 — The Department of Corporations, California’s securities regulator, today issued a revised list of top ten securities scams and a warning to investors to thoroughly investigate new investment opportunities before handing over money.

"With so many new investors in the marketplace, it is important that they know what to watch out for and how to distinguish between real investment opportunities and scams," said Acting Commissioner, William Kenefick. "The tried and true rules of dealing with licensed entities and individuals and investing in products that have stood the test of time or have been thoroughly reviewed, still hold true."

In cooperation with the North American Securities Administrator Association, the department issues its updated list of top ten investment frauds that includes Internet fraud, affinity group fraud, investment seminars, telemarketing fraud and viatical investments, to mention a few.

The complete list of Top Ten Scams are currently listed on the department’s Website and reflect the Department of Corporations’ 1999 enforcement priorities:

  1. Affinity group fraud — the department has brought a number of major enforcement actions recently involving breach of trust and fraud on religious, ethnic and professional groups by members of these groups or persons claiming to want to assist these groups. Targeted advertising in the media is used to identify potential victims, often with offers of employment or financial advice.

    Asian communities in Southern California have recently been targets of bogus investments in precious metals and foreign currencies allegedly being traded on the Hong Kong Exchange. Unscrupulous promoters rely on the financial crises in Asia and elsewhere to entice investors to invest in speculative foreign currency investments, usually on unregulated or non-existent foreign exchanges. Typically, the promoter just steals all the money and no investments are actually made.

  2. Internet fraud — the department has identified illegal and fraudulent investment offerings, market manipulation, insider trading, and unlicensed broker-dealer, agent and investment adviser activity on the Internet. In a major enforcement action, the department was able to stop a $100 million scam on the Internet involving investments in viatical insurance settlements and was able to get a receiver appointed.

    The department has issued 39 Desist and Refrain Orders to a total of 158 subjects, has filed one civil injunctive action and obtained a preliminary injunction against 26 defendants, and has referred two cases for criminal prosecution in offerings on or involving the Internet.

  3. Abusive sales practices by licensed broker-dealers and agents — in the regulated industry, sales of securities to unsuitable investors, failure to disclose critical information, fraudulent offerings of securities and market manipulation, particularly in the microcap marketplace have become increasingly common and are a great concern to the department. A number of enforcement actions have been brought to revoke the broker-dealer licenses of out-of-state securities brokers who specialize in the manipulation of low-priced, microcap stock offerings.

    On-line trading and day trading of securities have raised issues of trade execution, licensing, suitability and disclosure which both the California Senate and the U.S. Senate Permanent Subcommittee on Investigations have held hearings about.

  4. Investment seminars and financial planner activity — the department now has greater responsibilities for investment adviser activity and is concerned about the proliferation of investment seminars and financial planners offering investment advice which may require a license as an investment adviser and in which there may be a lack of disclosure of conflicts of interest and hidden fees and commissions.
  5. Telemarketing fraud — as many as 100 new boiler rooms, or high pressure telephone sales operations, have opened in Los Angeles in the last year selling illegal and fraudulent investment products; many of them are making as much as $1 million a month. They will say anything to convince the investor to part with his or her money because they don’t have any intention of delivering on their promises. The best way to protect yourself is to hang up on unsolicited sales calls.
  6. Ponzi/Pyramid schemes/Bunco — named after the infamous Charles Ponzi, these schemes are a swindle in which tremendous rates of return are paid to initial investors out of funds from later investors, who end up losing all of their money when the house of cards falls down. A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all the emphasis on bringing in new members/investors and not on selling the product or service.

    Recently, there have been a large number of promissory note cases in which investments are allegedly secured by overvalued or non-existent assets or debt. Another common scheme offers investments in alleged "prime bank interests" of world banking entities, but there is no such thing.

  7. Viatical investment scams — viatical investments are one of the hottest new investment products in the marketplace, and also one of the riskiest. Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in their final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker.

    On the investment side, these investments are being heavily marketed as humanitarian investments to elderly investors and investors with IRA accounts for whom they are entirely unsuitable. Because of the uncertainties involved in predicting when a person is going to die, even a person with a disease considered terminal, these investments must be considered extremely speculative and are only appropriate for persons willing to risk losing all their investment.

  8. Illegal franchise offerings — the department has brought a number of actions relating to inadequate disclosure and fraud in connection with the offering of franchise investments, often through business opportunity and franchise shows that target those seeking to invest in a business which they can run themselves.
  9. High tech products and services — the department has participated in a number of multi-state and state-federal task force actions against illegal offerings of high tech investments that target unsophisticated investors with promises of high profits with no risk by getting in on the ground floor of the latest high tech products and services such as 900 number investments, Internet service providers and high tech virtual reality shopping malls.
  10. Entertainment — many scams offer opportunities for investments in movie deals and other entertainment products with promises of guaranteed profits and pitches that emphasize the profitability of many popular entertainment vehicles without mentioning the risk.

The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.

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